Investment trust picks for 2012

In falling markets, those two factors are liable to work the other way. However, because trusts have a known number of shares in issue, this closed-end status should protect them from large fund withdrawals - which can disrupt long-term strategies - and their remits may allow them to consider a wider range of refuges, such as direct exposure to gold or property.

More importantly, once fear starts to evaporate, there can be golden opportunities in deeply discounted trusts.

We asked five investment trust experts to pick growth and income investment trusts for 2012.


PERSONAL ASSETS TRUST: Price £340.60 Premium 2.5% Yield 1.6% TER 1.09%

Sebastian Lyon at Troy Asset Management has been investment adviser to Personal Assets Trust since March 2009 and has so far proved a worthy successor to founder manager Ian Rushbrook.

Jean Matterson, at Rossie House Investment Management, believes PAT's long-term record of steady growth should comfort investors in current markets. "It may not keep pace in a bull market, but Lyon has proved adept at adding to equities when they look cheap and reducing them when they are expensive, thereby protecting shareholders' capital," she says.

Charles Cade, head of the investment trust team at Numis Securities, says the trust's key attractions include its focus on capital protection and growth, and its zero discount policy. The latter is achieved by buying back or issuing unlimited numbers of shares if the price diverges from the net asset value by up to 2%.

Cade says Lyon is worried that "asset prices are too high and interest rates too low, and that at some stage both will have to undergo a major realignment". He has therefore kept close to 40% in liquidity, primarily in index-linked securities.

BRITISH EMPIRES SECURITIES & GENERAL TRUST: Price 453p Discount 3.7% Yield 1.9% TER 0.76%

Discounts are the main reason why James Brown, investment trust analyst at Winterflood Securities, backs this trust. Managed by John Pennink, at Asset Value Investors, it invests primarily in European and Asian holding companies.

It has underperformed recently as its holdings have sunk to deep discounts. By adding the discount on the holding companies to the discount on the trust's shares, Brown reckons investors can access the underlying portfolio at a 40% discount.

SCOTTISH MORTGAGE TRUST: Price 625p Discount 6% Yield 2% TER 0.52%

John Newlands, head of investment trust research at Brewin Dolphin, makes Scottish Mortgage Trust his solid growth pick. He warns that the Baillie Giff ord trust has near permanent gearing of between 10 and 20% and can be volatile over the short term.

However, it has been impressive over most longer-term timescales, so he believes its recent travails provide a good buying opportunity for those prepared to commit to a longer-term investment.

STANDARD LIFE EUROPEAN PRIVATE EQUITY: Price 114.5p Discount 48.9% Yield 1.1 % TER 1.03%

Standard Life European Private Equity is a Europe-focused fund of private equity funds. It has a good 10-year record, but it currently stands on a massive discount because of fears over its ability to fund its future commitments of almost £130 million and concern about the situation in Europe.

James Burns, who heads Smith & Williamson's investment trust team, believes worries about its commitments are overdone, as these should be substantially covered by cashflow from the portfolio and the company's debt facility.

"The manager believes that close to £30 million of commitments have already passed their investment period and are unlikely to ever be drawn down. For those willing to risk a European investment in the current environment, I believe there is substantial upside here," Burns says.


STANDARD LIFE EUROPEAN PRIVATE EQUITY: Price 114.5p Discount 48.9% Yield 1.1 % TER 1.03%

Newlands says the Standard Life trust is out of favour for at least three reasons.

"First, sentiment towards private equity investment remains poor. Second, this trust has the word Europe in its name and, given the present economic turbulence across euroland, this has negative connotations.

"Third, the trust got into difficulties during the credit crunch and had to sell down some portfolio holdings to meet its undrawn commitments. It is in far sounder shape now, yet its shares are selling for half their stated net asset value."

Brown also believes the discount is excessive. "There is a risk that the net asset value per share will fall in the near term, but the trust is well run by a respected team and the wide discount compensates for the risk."

BAKER STEEL RESOURCES TRUST: Price 96.8p Discount 12.5% Yield nil TER 2.05%

Burns and Matterson both make Baker Steel Resources their speculative growth tip.

"Baker Steel has a concentrated portfolio of unquoted mining and commodity issues. Many of the assets are held at book cost, and there is potential for some stockmarket launches and trade sales, which could enhance the net asset value substantially. It is speculative because in current markets this may not happen," says Matterson.

Filling in some of the details, Burns says Baker Steel's top three holdings - accounting for about 55% of net asset value - are being lined up to be either listed or sold.

"If any of these deals moves through to fruition, the asset value uplift may be substantial," he says.

ADVANCE FRONTIER MARKETS: Price 39.9p Discount 13.8% Yield nil TER 1.53%

Trusts are well positioned to cover frontier stockmarkets. Cade says frontier markets are interesting because they are typically experiencing rapid GDP growth and have lower debt burdens than most developed economies. He likes Advance Frontier Markets because it is a fund of funds offering "best of breed' exposure to local managers.

He adds: "Performance was hit in 2011 by general investor risk aversion, but we believe valuations are attractive in many of these markets. We expect the discount to narrow."


ECOFIN WATER & POWER OPPS: Price 111p Discount 32.6% Yield 4.4% TER 2.02%

The ordinary income shares of this trust illustrate the split-capital approach. They are favoured by James Burns, who leads Smith & Williamson's investment trust team. Ecofin invests internationally in utilities, infrastructure and energy.

Burns notes that the ordinary income shares are part of a complicated capital structure, which leaves them highly geared. That leaves them vulnerable to a major setback. However, this is off set by the 33% discount to net asset value (NAV), which lifts the yield to 4.4%. Dividends are paid quarterly and have grown 30% over two years.

MURRAY INTERNATIONAL: Price 901p Premium 7.4% Yield 4.1% TER 1.23%*

This global trust has achieved 14.3% annual dividend growth over five years. Its shares yield 4.1% despite trading on a substantial premium. It is the income choice of Brewin Dolphin's veteran trust guru, John Newlands, who has been one of our most successful trust-pickers.

With a strong emphasis on Asia and emerging markets, Murray International's total returns have been well ahead of most other global trusts since Bruce Stout took charge in 2004. "Stout seems to possess the uncanny knack of identifying the world's trouble spots while simultaneously spotting value that others have overlooked - what he calls GASP (Growth at a Scottish Price)," comments Newlands.

UTILICO EMERGING MARKETS: Price 149p Discount 6.5% Yield 3.6% TER 2.64%*

An emerging markets flavour is also favoured by Jean Matterson, a partner at Rossie House Investment Management.

She says: "Utilico Emerging Markets has investments in growing parts of the world, trades on a high single-figure discount and has a yield of 3.6%." The trust has grown its dividend by over 14% a year over five years.

F&C COMMERCIAL PROPRTY TRUST: Price 103.9p Premium 10.4% Yield 5.8% TER 2.11%*

James Brown of Winterflood Securities focuses on an illiquid asset class by making F&C Commercial Property Trust his income tip. Thanks to its heavy weighting in central London, it has been "the stand-out performer among UK property funds" he says. Despite trading at a premium to NAV, its shares off er a meaty yield, although there has been no dividend growth in five years.

LOWLAND INVESTMENTS: Price 765p, Discount 8.0%, Yield 3.7% TER 0.74%

The trust had to hold its dividend two years ago, but is now back to growth. Its shares are on one of the widest discounts in the UK growth & income sector and yield 3.7%. They are backed by Charles Cade, head of investment trusts at Numis Securities.

"James Henderson has managed Lowland since 1990 and has a strong track record through a value approach. The trust is differentiated from its peers by its diversified portfolio spread evenly between large, mid and small caps," Cade says.

*Total expense ratios do include a performance fee

This article was written for our sister website Money Observer