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Winterflood: investment trust tips for 2017

Looking for inspiration for your investment trust portfolio? Winterflood Securities has published the annual review of its recommendations.

This gallery summarises the changes made by Winterflood Securities in its annual review of investment trust recommendations.

2016 was a tricky year for the broker’s investment trust analysts. Although the slump in the pound caused by the Brexit vote in June and the election of Donald Trump as US president in November boosted stock markets, the uncertainty surrounding both events undermined appetite for investment trusts.

As a result while the model portfolio based on Winterfloods’ investment trust selections rose 18.1%, this was behind the 20.2% gain in its benchmark, the WMA Balanced index.

Nevertheless, with 30 of Winterflood’s 48 investment trust tips beating their peer group last year the broker had scope to take profits on some winners and reinvest in cheap trusts whose share prices started the year at unusually wide discounts to net asset value.

In a New Year overhaul, the Winterflood analyst team led by Simon Elliott added 15 investment trusts and removed nine, leaving them with a portfolio of 41 holdings, 21 of which are corporate broking clients. For more information use the links on the following slides to see the investment trust fact sheets.

Next: Mercantile move

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This gallery summarises the changes made by Winterflood Securities in its annual review of investment trust recommendations.

2016 was a tricky year for the broker’s investment trust analysts. Although the slump in the pound caused by the Brexit vote in June and the election of Donald Trump as US president in November boosted stock markets, the uncertainty surrounding both events undermined appetite for investment trusts.

As a result while the model portfolio based on Winterfloods’ investment trust selections rose 18.1%, this was behind the 20.2% gain in its benchmark, the WMA Balanced index.

Nevertheless, with 30 of Winterflood’s 48 investment trust tips beating their peer group last year the broker had scope to take profits on some winners and reinvest in cheap trusts whose share prices started the year at unusually wide discounts to net asset value.

In a New Year overhaul, the Winterflood analyst team led by Simon Elliott added 15 investment trusts and removed nine, leaving them with a portfolio of 41 holdings, 21 of which are corporate broking clients. For more information use the links on the following slides to see the investment trust fact sheets.

Next: Mercantile move

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Out of Mercantile

In the first of four big changes to the UK portion of its model portfolio, Winterflood ‘sold’ its notional 4.3% weighting to Mercantile (MRC), a corporate client managed by a team led by Guy Anderson, at a price of £17.21. It switched to a 4% position in BlackRock Smaller Companies (BRSC) at 978p per share, preferring the latter trust run by Mike Prentis for exposure to UK mid- and small-cap stocks.

The move was prompted by shares in the BlackRock trust trading on a wider discount to net asset value (NAV) than Mercantile. ‘While we continue to rate Mercantile investment trust’s management team highly and believe its size provides good liquidity, we believe that BlackRock Smaller Companies offers better value at present on its current discount of 16% (Mercantile 13%),’ Winterflood said.

‘BlackRock Smaller Companies has an impressive performance record, both in terms of relative performance and consistency, outperforming its benchmark in each of its last 13 financial years. The fund also has a good record against the peer group average performance,’ the broker added.

Next: DIG these trusts

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DIG these trusts

Winterflood added three other UK investment trusts to its model portfolio, including Dunedin Income Growth (DIG) in which it allocated a 4.5% position at 250.75p per share, attracted by the stock’s 10% discount to net asset value (NAV).

‘While its performance record is not the strongest in its peer group, it offers mainstream, large cap exposure to UK equities and has a yield of 4.6%, one of the highest in the sub-sector. Its dividend has been increased in 32 of the last 36 years. Furthermore with ongoing charges of just 0.62%, it compares well with its peer group,’ Winterflood said.

‘We believe that if Dunedin Income Growth’s pick-up in performance over the last 12 months can be maintained there is scope for its discount to tighten materially,’ the broker added.

Winterflood also found room for Finsbury Growth & Income (FGT), a corporate client run by star fund manager Nick Train (pictured), in which it ‘bought’ a 4.5% position at 654p per share. Although the portfolio’s total return of 15% lagged the FTSE All Share last year, Winterflood remains impressed with Train’s high conviction, buy-and-hold approach to high quality stocks.

It also allocated 2% to River & Mercantile UK Micro Cap (RMMC), another corporate client, at 133p per share, expressing faith in manager Philip Rodrigs’ ability to exploit pricing anomalies in the country’s smallest stock market companies and attracted by a 9% discount to NAV.

Next: keep Barnett, trim Woodford

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Keep Barnett, trim Woodford

Winterflood maintained a 4.5% allocation to Perpetual Income & Growth (PLI) arguing that although the UK equity income trust suffered a de-rating last year its 8% discount to net asset value (NAV) looked good value compared to sister fund Edinburgh (EDIN), which is also managed by Mark Barnett.

‘Despite a difficult year in 2016, we continue to rate Perpetual Income & Growth and its manager, Mark Barnett, highly,’ said the broker. ‘The fund has a strong long-term performance record under Barnett’s management, outperforming the FTSE All Share and the peer group over five and ten years. Over the last five years the fund has delivered a NAV total return of 90%, compared with 62% for the FTSE All Share Index and 80% for the peer group weighted average.’

By contrast, Winterflood lowered its holding in Woodford Patient Capital (WPCT), another corporate client run by star fund manager and Barnett’s former boss, Neil Woodford (pictured). The position was reduced to 2% from 2.8% at 89.5p per share, although the broker believes its 6% discount following a 10% drop in the share price last year offers an ‘attractive entry point’.

Also trimmed were two UK stalwarts enjoying a post-Brexit bounce: Alex Wright’s Fidelity Special Values (FSV) moved from 4.1% to 4% of the portfolio at 227p per share, and Alastair Mundy’s Temple Bar (TMPL) slipped from a 5.5% to 4.5% weighting at £12.41 a share, although the broker believes both remain good value.

In its last UK change, Winterflood lifted Henderson Smaller Companies (HSL) to 4% from 3.8% of the portfolio at 670p per share, saying Neil Hermon’s long-term, top-performing fund did not deserve to be on its current 15% discount.

Next: Murray International switch

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Murray International switch

Turning to global trusts, Winterflood locked in a dramatic 58% gain from Murray International (MYI) after the equity income fund managed by Bruce Stout (pictured) recovered from several years of underperformance in 2016. Instead it switched to a 2% holding at 281.75p per share in JPMorgan Global Growth & Income (JPGI), a corporate broking client managed by Jeroen Huysinga.

Similarly, the broker dropped Witan (WTAN) after the multi-manager fund bounced back from an unsteady first half and switched to a 1% position in British Empire (BTEM), also a corporate client, at 646.5p per share. Its share price recovery last year under manager Joe Bauernfreund was aided by hedge fund activist Elliott Capital taking a 5% stake.

‘The first two funds have been re-rated and are currently trading on a 4% premium and 6% discount respectively. Murray International has performed particularly well in the last 12 months, assisted by its bias to Asia and emerging markets,’ said Winterflood.

‘In contrast JPMorgan Global Growth & Income and British Empire are trading on discounts of 7% and 10% respectively. We believe that the former could continue to be re-rated following its move to the Global Equity Income sub-sector and its decision to pay out 4% of its NAV as a dividend every year,’ the broker said.

Winterflood also trimmed a position in Monks (MNKS) from 3.6% to 2% at 573p as it vied with Baillie Gifford stable mate and long-term outperformer Scottish Mortgage Trust (SMT), which was reduced from 3.3% to 2% of the portfolio at 325.8p per share.

Next: US, Europe and Japan

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US, Europe and Japan

Sticking with overseas trusts, Winterflood expanded its US exposure by adding to JPMorgan American (JAM), a corporate client run by Garrett Fish it regarded as good value at a 4% discount. The model portfolio’s position rose to 4.5% from 3.9% at a share price of 369.5p. Meanwhile, North American Income (NAIT), also a corporate client, was lifted from 4.1% to 4.5% at £12.70 per share in response to its improved performance since Fran Radano and Ralph Bassett of Aberdeen Asset Management took over in June 2015. These moves followed the removal of Gabelli Value Plus+ (GVP) last year for disappointing performance.

In Europe, Winterflood took advantage of abnormally wide discounts caused by the Continent’s uncertain political outlook to snap up shares in three corporate clients. A 1% stake in TR European Growth (TRG) was opened at 785p per share and a 16% discount in the belief that manager Ollie Beckett had positioned the smaller companies fund for a recovery. Similarly, a 0.9% weighting in his colleague John Bennett’s Henderson European Focus (HEFT) was lifted to 1% at £11.09 a share and a 9% discount, while Fidelity European Values (FEV), a ‘core defensive’ fund under manager Sam Morse, was raised the same extent at 185.2p per share on a 13% discount. This follows the removal from the portfolio last year of Jupiter European Opportunities (JEO), a former top performer in 2015 whose share price suffered a de-rating after its growth in net asset value lagged the index.

In Japan Winterflood switched 2.4% of the model portfolio from JPMorgan Japanese (JFJ) at 333p into a 2% position in Baillie Gifford Japan (BGFD) at 587p. Although the latter was more expensive with a 2% discount compared to JFJ’s 13%, the broker explained ‘we believe the Baillie Gifford is the “best in class” in this sub sector and are happy to recommend it when it is not trading on an extended premium’.

Next: emerging markets switch

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Emerging markets switch

A 1.1% position in JPMorgan Emerging Markets (JMG) was exited at 691p and replaced with a 1% purchase of fellow corporate client BlackRock Frontiers (BRFI) at 141p per share.

‘While we regard the JPMorgan fund as offering core, actively managed mainstream emerging market exposure, we believe that the BlackRock fund provides specialist exposure to more esoteric markets that the manager, Sam Vecht, is adept at navigating in order to generate attractive returns on capital,’ said Winterflood.

Although BlackRock Frontiers trades slightly above net asset value (NAV) and looks dear against JPMorgan on a 13% discount, Winterflood said the risk of the shares de-rating and falling sharply from a premium to a discount was limited by the trust allowing investors to sell out at close to NAV every five years.

Meanwhile a 2% position in corporate client Templeton Emerging Markets (TEM) was maintained after the portfolio’s 56% advance under Carlos Hardenberg, who replaced former manager Mark Mobius in October 2015.

‘While performance has rebounded strongly under the new manager, the discount has failed to narrow. In our opinion, the current discount of 13% therefore offers a notable value opportunity, and we believe that this could tighten if the fund continues to outperform and investor sentiment towards emerging markets continues to improve,’ Winterflood said.

Next: Asia additions

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Asia additions

In Asia Winterflood has added two new trusts and raised a position in one corporate client.

Responding to the turnaround by smaller companies investor Nitan Bajaj (pictured), the broker initiated a 1% position in Fidelity Asian Values (FAS) at 365.5p a share, believing the 4% discount, which has reduced by two thirds in the past year, could tighten further and boost the share price.

It also added a 2% weighting to Aberdeen Asian Income (AAIF) at 202.5p in the hope that the recent revival of its value style could resurrect long-term performance and see the trust regain the premium it lost two years ago. It trades at a 7% discount to NAV and offers a 4.2% yield.

Lastly a 1.1% allocation to Schroder Asian Total Return (ATR) was raised to 2% at 262p a share. Managers Robin Parbrook and King Fuei Lee have achieved strong performance by protecting investors in difficult market conditions. ‘Although the fund’s discount of 5% is tighter than the majority of its peers, we believe that there is potential for the fund to trade on a premium and so it therefore offers value,’ Winterflood said.

Next: Backing BlackRock World Mining

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Backing BlackRock World Mining

Among specialist trusts, Winterflood added one and reduced two funds, all of them corporate clients. These included a new 1% stake in BlackRock World Mining (BRWM), whose lead manager is Evy Hambro (pictured), which was opened at 341.5p. Although the share price more than doubled last year after a mauling in the previous three years, Winterflood believes there could be further to go once there is more certainty about the dividend which was cut last year.

Allianz Technology (ATT) was cut to 1% from 3.5% at 832p a share and Worldwide Healthcare (WWH) lowered from 1.9% to 1% at £21.71 with Winterflood saying it was more diversified and, with a discount target of 6%, less volatile than its sister fund Biotech Growth Trust (BIOG).

Last year was good for the private equity sector. With trusts’ hefty discounts narrowing in response to the bid for SVG Capital (SVG) and developments at Electra (ELTA), Winterflood trimmed its three model portfolio holdings though it hoped for further gains. Pantheon International (PIN) dropped from a 3.5% to 2% weighting at £17.30, the allocation to HgCapital Trust (HGT) slipped from 2.5% to 1% at £15.33 and the position in corporate client Standard Life European Private Equity (SEP) was reduced from 2.4% to 1% at 290p.

Next: Property and bonds

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Property and bonds

Winterflood swooped on corporate client F&C Commercial Property (FCPT) after its discount ballooned to 24% after the EU referendum last summer. It has retained a 2.5% weighting, pointing out that although the shares had reverted to a 4% premium to net asset value and were no longer dirt cheap, they offered an attractive 4.4% dividend yield, a healthy balance sheet and relatively low exposure to the City of London, where concerns about the impact of Brexit remain.

TR Property (TRY) remains on a wide 13% discount, tempting Winterflood to lift its position in the portfolio from 2.3% to 2.5% at 298.3p a share.

Moving to bonds, Winterflood took a profit on a 3% position in convertibles (loans that can be converted to shares) issued by Asia equity trust Edinburgh Dragon (EFM) and switched the money to CVC Credit Partners European Opportunities (CCPG) at 104.5p a share. CCPG, a Winterflood corporate client, invests in loans, high yield bonds and structured credit. While rising US interest rates may prove a challenge Winterflood said its 4.8% income yield was attractive while a quarterly tender offer to buy back its shares at close to NAV reduced the risk of the 4% discount widening much further.

Winterflood pruned its other bond holdings with City Merchant’s High Yield (CMHY), a corporate client, trimmed to 3% from 3.4% at 191.5p a share, JPMorgan Global Convertibles Income (JGCI) dipping from 3.2% to 3% at 91p, TwentyFour Income Fund (TFIF) lowered from 3.2% to 3% at 112.25p and preference shares (RECP) in Real Estate Credit (RECP) reduced from 3.1% to 3% at 103p.

Next: RIT Capital Partners sold

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RIT Capital Partners sold

Winterflood has been active in the last portion of its portfolio given to defensive trusts investing in hedge funds or ‘alternative’ assets.

Its biggest move has been to sell a 2.7% position in RIT Capital Partners (RCP) at £18.55 after shares in the multi-asset trust chaired by Lord Rothschild (pictured) moved to a 6% premium to net asset value. It has replaced this with a 2.5% holding in Capital Gearing Trust (CGT), bought at £37.94 on a 2% premium. The trust has been managed by Peter Spiller for 35 years and invests in bonds, gold and investment trusts on wide discounts. ‘Capital Gearing has an impressive record of delivering strong absolute returns with considerably lower volatility than equity markets,’ noted Winterflood.

With a further eye to potential market turbulence this year the broker also nudged up its holding in Personal Assets (PNL) from 2.3% to 2.5% at £392.80 a share. Managed by Sebastian Lyon at Troy Asset Management, this trust also has a strong record in preserving shareholder capital.

Elsewhere the broker switched 2% at £21.10 a share in BH Macro (BHMG), where shareholders are being offered an exit through a 100% tender offer, to build a 2.5% position at 199p in Highbridge Multi-Strategy (HMSF), ‘which has provided solid performance over the last 12 months, despite the drag of its legacy positions.’

In infrastructure a 2.5% weighting was opened in John Laing Environmental Assets (JLEN), another corporate client, at 108.25p a share, replacing Greencoat UK Wind (UKW) which looked expensive on a 17% premium.

Next: the global portfolio in full

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The global portfolio in full

Winterflood’s model portfolio is loosely based on the WMA Balanced index whose asset allocation is currently 35% UK, 30% international equities (shares), 17.5% bonds, 5% cash, 5% commercial property and 7.5% alternative assets or hedge funds.

After the New Year review the Winterflood portfolio is slightly underweight the UK and bonds and overweight international equities and alternative assets:

UK 34%: Perpetual Income & Growth (4.5%), Temple Bar (4.5%), Dunedin Income & Growth (4.5%), Finsbury Growth & Income (4.5%), Fidelity Special Values (4%), BlackRock Smaller Companies (4%), Henderson Smaller Companies (4%), Woodford Patient Capital (2%), River & Mercantile UK Micro Cap (2%).

International equities 36%: North American Income (4.5%), JPMorgan American (4.5%), Scottish Mortgage Trust (2%), Monks (2%), JPMorgan Global Growth & Income (2%), Baillie Gifford Japan (2%), Schroder Asian Total Return (2%), Aberdeen Asian Income (2%), Templeton Emerging Markets (2%), Pantheon International (2%), British Empire (1%), Henderson European Focus (1%), Fidelity European Values (1%), TR European Growth (1%), Fidelity Asian Values (1%), BlackRock World Mining (1%), BlackRock Frontiers (1%), Allianz Technology (1%), Worldwide Healthcare 1%, HgCapital (1%), Standard Life European Private Equity (1%).

Bonds 15%: City Merchants High Yield (3%), JPMorgan Global Convertibles Income (3%), TwentyFour Income Fund (3%), CVC Credit Partners European Opportunities (3%), Real Estate Credit preference shares (3%).

Commercial property 5%: F&C Commercial Property (2.5%), TR Property (2.5%).

Hedge funds / alternatives 10%: Capital Gearing Trust (2.5%), Personal Assets (2.5%), Highbridge Multi Strategy (2.5%), John Laing Environmental Assets (2.5%).

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