Hidden gems for your portfolio
More than 400 investment trusts and investment companies are quoted on the London Stock Exchange and AIM. These provide an easy way for individuals with a modest stake to gain access to a variety of professionally managed investment portfolios.
However, private investors could be forgiven for thinking their choice is rather limited because most attention tends to be focused on large, broadly based vehicles such as global growth trusts. For more adventurous investors, however, a wealth of more esoteric trusts is worth exploring.
The breadth of choice is clear from the list of specialist sectors into which trusts are grouped. These include financials, commodities, property, infrastructure and liquidity funds. The best-performing investment companies - and sometimes the worst - tend to be more specialist in nature.
Recently, the top one-year returns have come from trusts such as Greenwich Loan Income Fund and Carador, which invest in corporate debt; specialist property companies such as Aseana Properties, which focuses on property development opportunities in Malaysia and Vietnam; and hedge funds such as Third Point Offshore Investors and private equity company Princess Private Equity.
Some investment companies are unique. One such firm, Juridica Investments, provides strategic capital to the business community and the legal markets for corporate claims. It was launched in 2007 as a closed-end fund domiciled in Guernsey and is listed on AIM.
It invests in a diversified portfolio of litigation and arbitration claims. Its clients are large companies and the legal firms that represent them. Juridica only accepts claims that have already been vetted by leading legal firms.
Juridica's founders, Richard Fields and Timothy Scrantom, argue that corporate claims can be considered an asset class in their own right.
They contend that the value of corporate claims is only loosely correlated to economic conditions and that they can be regarded as counter-cyclical and therefore a useful diversifier when market conditions are uncertain. Other specialist trusts may also be worth considering for this reason.
Once you become aware of the breadth of the specialist investment company choices available, the picture can become confusing.
We asked several analysts and investment advisers who focus regularly on investment trusts and companies to name some of those they believe are worthy of private investor consideration.
Simon Elliott, head of investment trust research at Winterflood Securities, likes the health sector, but he suggests that, rather than investing in a mainstream health trust, private investors should consider Biotech Growth, a trust that invests in emerging biotechnology companies.
"The demographic argument applies to this trust just as it does to mainstream pharmaceutical companies: an ageing global population will need more drugs. But we feel this trust has better growth prospects because it invests in smaller companies that are developing drugs, and there is a lot of merger and acquisitions activity in that sector."
Commodity trusts have become better known in the past couple of years, mainly thanks to rising oil and gold prices, but there are a growing number of more specialist commodity trusts, such as Ceres Agriculture.
However, James Glass, investment researcher at Numis Securities, spotlights a trust that invests in diamonds, Diamond Circle Capital. This London-listed company offers investors exposure to a portfolio of high-quality polished diamonds, including coloured and large white stones, with a purchase price of £3 million to £5 million.
Glass says: "As a high-value commodity, diamonds share many of the investment attributes of gold. However, the asset class is difficult for investors to access because diamonds are not a homogenous product and specialist knowledge is required for valuation and trading.
"Furthermore, it is difficult for all but the wealthiest investors to build a diversified diamond portfolio."
He points out that this company provides a way for more modest investors to gain exposure to high-quality diamonds. If inflation starts rising again, as Glass believes it could, as a result of monetary easing around the world, diamonds, as a tangible asset, should be a safe haven as secure as gold.
Indeed, according to Numis, five-carat diamond prices have actually outperformed gold bullion over the past 25 years.
Environmental investment has become more popular in recent years, but it is still overlooked by many investors.
Tim Cockerill, head of research at Rowan & Co Capital Management, suggests that those who haven't got exposure should definitely give it some thought and he recommends Impax Environmental Markets.
"I like this trust because the company running it is a specialist boutique that focuses on environmental investment and because the portfolio is diversified across various sectors, including firms operating in renewable energy, waste management and water pollution management.
"With the growing strain on resources in Asia, such as water in India and China, I believe technology companies operating in that area are likely to do well, so I think this trust is looking pretty attractive at present."
A few years ago hedge funds were fairly mysterious and very much the preserve of institutional investors. Today they are more accessible to private investors and performance records can be scrutinised.
Although many have failed to deliver cash-plus returns in all market conditions in recent years, they may still be worth considering for portfolio diversification.
Ewan Lovett-Turner, investment researcher at Numis Securities, believes two of the best are the large, liquid funds of hedge funds Dexion Absolute and Absolute Return Trust. Of Dexion Absolute, he says: "We rate the manager, Aurora, highly and they have delivered strong returns in the aftermath of the credit crisis."
Absolute Return Trust "has delivered strong long-term performance and has consistently traded at a narrower discount than the peer group', Lovett-Turner adds.
Private equity companies - firms not quoted on the stockmarket - can generate significant growth for investors, but they are more risky and more likely to fail. Also it is difficult for ordinary investors to gain a direct stake in a private company.
This is where private equity trusts can come in useful. For Richard Wadsworth, partner in wealth managers Fitzallan, these trusts are an attractive satellite holding in an investment portfolio.
"Private equity can provide a different type of return to mainstream businesses," he says. "The advantages of going through a private equity trust are that you have the comfort of knowing there is an expert board of directors overseeing the investments and greater regulation - regarding valuations, for instance."
Wadsworth likes Pantheon International Participations. This is a fund of private equity funds, so it provides even wider diversification than a directly invested fund. Candover is another of his picks.
Split capital trusts have been out of favour since a scandal seven years ago. However, Elliott at Winterflood says there is good value to be found in the sector. He cites Ecofin Water & Power Opportunities as a promising trust.
He says: "Highly geared ordinary shares in this trust, which invests in utilities globally, pay a yield of around 4% and the prospects for capital growth are good. Its investment portfolio is more biased towards energy than water.
"Given the growing gap between supply and demand for energy, we believe these shares will continue to produce steady growth."
For a genuinely different investment, Elliott suggests Cambium Global Timberland, a closed-end, Jersey-domiciled investment company that invests globally in timber plantations and timber-related activities.
It takes a socially responsible approach to investment and diversifies its risk by investing in different species and ages of tree as well as maintaining a global spread of holdings.
Elliott says: "Demand for timber is influenced by what is happening in housebuilding and the construction industry, but if the trees aren't required, they can be left in the ground, so your investment will literally continue to grow."
With investment trusts, the world is your oyster. However, specialist trusts are likely to be more volatile than more broadly based trusts and should only make up a small portion of a diversified portfolio.
This article was originally published in Money Observer - Moneywise's sister publication - in September 2010
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
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%.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.