Curling, who runs the five crown-rated Jupiter Fund of Investment Trusts, says that given the lack of liquidity in the sector, he feels that it is better to buy and hold best-of-breed managers instead of hunting for out-of-favour trusts that are trading on a wide discount.
The manager says that he used to try to play discount volatility to drive his fund’s performance, but that narrowing discounts across the board have seen him change his priority.
"I think my strategy for picking investment trusts has changed a lot over the years," he said.
"People who used to run funds of investment trusts could make returns by simply arbitraging investment trusts – that is to say buying one on a high discount and then selling it on a low discount. I take a different view now."
He says he starts by working out what asset allocation he wants to achieve, but from there on in, focuses exclusively on quality.
"I start with number-one, which is to try and get asset-allocation right – so where in the world do I want to be investing. Then I try to pick the best manager in any given sector as they will be the ones which add the most value," he explained.
"I have turned my strategy on its head the more I think about it, because now I just look for the best managers. You don’t need to look anywhere else than First State and Aberdeen when you are investing in the Far East, or Baillie Gifford for Japan, for instance."
"I think you can end up wasting a lot of time looking around for cheaper trusts," he added.
Our data shows that Curling holds the Aberdeen All Asia and Asian Smaller Companies trusts, Baillie Gifford’s Japan trust and First State’s Scottish Oriental Companies trust in his portfolio.
Curling took over the £108m Jupiter Fund of Investment Trusts in January last year. He also runs Jupiter UK Smaller Companies, Jupiter Monthly Income and the Jupiter Primadona Growth investment trust.
Since he began running Jupiter Fund of Investment Trusts, it has slightly underperformed against both the IMA Flexible sector and its benchmark – the FTSE All Share Equity Investment Instruments index – with returns of 16.09 per cent.
Performance of fund vs sector and index since Jan 2012
Source: FE Analytics
Although Curling admits that he tries not to buy a trust that is trading on a premium, because the chance of downside surprise is higher, he says there are instances where a trust's discount/premium has had little impact on performance.
"I read something put out by Murray International, which is the star global trust which has pretty much always been trading on a premium over recent years," he said.
"Their point was that you could have gone and bought Alliance Trust on a 20 per cent discount or you could have bought Murray International on a 5 per cent premium. It showed that over the last few years, because the performance of Murray International was so much better, it more than made up the difference."
According to the AIC, on average Murray International has traded on a 5.36 per cent premium to its NAV over the last three years, while Alliance Trust has had an average discount of 16.01 per cent over that time.
However, as the graph shows, Murray International IT has delivered higher returns over the period.
Performance of trusts over 3yrs
Source: FE Analytics
Curling continued: "Obviously there are risks involved when buying a trust on premium. When you are buying a trust on a high discount, you do limit the downside and when you buy on a premium you can be increasing risk."
"The trust will be on a premium because they have performed well, but if their performance drops – which inevitably happens – or their sector is out favour, then the discount will widen," he added.
Curling says that discount volatility is one of the big turn-offs for anyone considering investing in trusts, and that more closed-ended funds should follow the example of FE Alpha Manager Francis Brooke’s Troy Income & Growth trust, which is using a discount control mechanism to make it more accessible to retail investors.
A discount control mechanism is usually a manager protecting his shareholders’ interests by buying back shares if the discount widens and issuing more shares when the trust starts trading on a premium.
"I don’t like buying on a premium because those premiums don’t seem to last very long. However, people are now prepared to buy on a premium because of the income aspect."
"Yields on government and corporate bonds are so low, so you can get an infrastructure trust that throws off a yield of 8 per cent, which the market is now pricing in, and they will be on a 6 per cent premium."
"Investors are right to be nervous about discounts, but what I would like to see is more management teams being more active by either buying back or issuing shares to make their trust a more liquid structure."
"Troy Income & Growth has been very good at that and have basically made it like an open-ended fund," he added.
Jupiter Fund of Investment Trusts has an ongoing charges figure (OCF) of 1.9 per cent and requires a minimum investment of £500.
