Our experts' investment trust picks for 2011
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Bank stress tests, fresh rounds of quantitative easing, fears of a double dip and problems across the eurozone have ensured a bumpy ride for stockmarket investors in 2010. The FTSE 100 started the year around 5500 and finished the year only a smidgeon up from that.
At the start of July 2010, we saw banks take a nosedive, as fear grew of a dreaded double-dip recession, and the FTSE 100 touched 4812.
Fast forward just four months and investors had perked up considerably at the news of a $600 billion (£380 billion) splurge of printed money in the US. On 4 November, the FTSE 100 soared to 5862, its highest since 2008.
Continued low interest rates and some better-than-expected company profits also helped keep the stockmarket fairly buoyant in 2010. But fund managers and stockbrokers believe volatility will continue in 2011 and that government spending cuts and tax rises will be painful.
Despite the uncertainty, our experts have picked their investment trusts to watch out for in 2011.
SCHRODER UK GROWTH FUND - Price 121p, discount 5%, yield 2.3%, gearing 13%
The Schroder UK Growth Fund has been managed since 2002 by Richard Buxton, head of UK equities at Schroders. He favours an exceptionally concentrated and actively managed portfolio and is prepared to deploy plenty of gearing.
This resulted in a steep plunge in 2008, but Buxton kept his nerve and was rewarded with a dramatic recovery in 2009.
James Brown of Winterflood Securities backed him in 2009 and is doing so again in 2011. "The trust's gearing has been reduced, but the portfolio remains concentrated. We rate Buxton highly and expect him to continue to add value," he says.
FIDELITY SPECIAL VALUES - Price 536.5p, discount 9.3%, yield 2.2%, gearing nil
Anthony Bolton picked Sanjeev Shah to succeed him as manager of Fidelity Special Values because he has a similarly brave investment style. The 39-year-old has achieved above-average returns over three years, but progress has been far from smooth.
James Burns of Smith & Williamson says: "I like Shah's contrarian approach and his zero weighting to mining shares. This hurt performance in 2010 but could stand him in good stead in 2011."
TROY INCOME & GROWTH TRUST - Price 47.5p, discount 1.7%, yield 3.8%, gearing nil
The former Glasgow Income Trust has been transformed by the board's decision in August 2009 to adopt an income and growth strategy, and appoint Francis Brooke of Troy Asset Management as manager.
Brooke invests mainly in UK blue chips with strong franchises and sustainable dividends, and puts an above-average emphasis on capital preservation.
Charles Cade of Numis Securities says Brooke has done well for the similarly oriented Trojan Income fund since 2004. He likes the trust's yield and its determination to keep the discount close to zero through share buy-backs and issuance.
HERALD INVESTMENT TRUST - Price 440p, discount 21%, yield 0.1%, gearing 11%
Herald invests in smaller quoted companies in the areas of technology, communications and multimedia companies. It has a global remit, but two thirds of its portfolio is in UK equities as that is where founder manager Katie Potts finds the best value.
Jean Matterson of Rossie House Investment Management made it her UK pick for 2010, and has been rewarded with a 40% total share price return. She agrees with Potts that there is still plenty of scope for its holdings to be re-rated or taken over.
"I expect the technology sector to continue to benefit from the drive to improve corporate productivity," Matterson says.
THROGMORTON TRUST - Price 163p, discount 18%, yield 1.7%, gearing 6%
Throgmorton invests in a wide mix of UK medium and smaller companies, with more than 40% of its holdings quoted on AIM.
It has been managed since 2008 by Mike Prentis and Richard Plackett of BlackRock, and is unusual in that it has a long/short portfolio that can raise its gearing to 30% or reduce its effective equity exposure to around 70%.
John Newlands of Brewin Dolphin, one of our top tippers in past years, says: "Richard and Mike have a knack not just of seeking out keenly valued smaller companies but of managing the portfolio, taking profits and reinvesting the proceeds in new ideas.
"This is a high-quality operation on an attractive discount."
NORTHERN INVESTORS COMPANY - Price 192p, discount 33%, yield 4%, gearing nil
Northern Investors is a small but well-established private equity trust that provides active managerial support to its unquoted holdings with a view to increasing their efficiency and value.
John Newlands of Brewin Dolphin tips the trust as one that highlights the advantages of the closed-end structure.
It originally focused on north east England, but now casts its net across the UK. 40% of its assets are in cash. If this is taken into account, its invested portfolio is priced on a excessively wide discount of around 60%.
He adds: "It is a well-managed company that is not well-publicised and is arguably mispriced as a result."
This article was originally published in Money Observer - Moneywise's sister publication - in January 2011
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).