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

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