In an earlier article, FE Trustnet looked at the broker’s switch recommendations in the core growth and income sectors. Here are its ideas for the satellite areas of a portfolio.
The analysts recommend selling out of some of the hot funds in the specialist sectors.
High Yield
Switch from Henderson Diversified Income to City Merchants High Yield
Read and Causer are co-managers of fixed income at Invesco. This is one of the few trusts to focus on bonds, with a specific emphasis on the high-yielding variety.
Concerns around the fixed interest market in general have pushed City Merchants High Yield on to a 7 per cent discount compared with a one-year average of 3 per cent and a five-year average premium of 1.6 per cent, according to the broker’s figures.
Although Winterflood still rates Henderson Diversified Income in its narrower sector, it says the current price for City Merchants High Yield represents an attractive entry point for broader credit exposure.
NAV has risen 23 per cent over the past year, Winterflood notes, which compares favourably to the FTSE 350 High Yield index and FTSE All Share, which have made 18.8 per cent and 21.58 per cent respectively.
Performance of indices over 1yr
Source: FE Analytics
The current yield is attractive at 6.4 per cent, although Winterflood notes that it is only 95 per cent covered.
The fund has around 30 per cent exposure to the floating rate notes that Henderson Diversified Income concentrates on, meaning that investors get some exposure to the inflation-protected asset class.
Ongoing charges are 0.83 per cent.
Property
Switch from F&C Commercial Property to Picton Property Income
Many experts have tipped F&C Commercial Property in recent weeks as investors begin to return to the battered property sector.
However, with the premium up to 14 per cent, Winterflood says it is time to look for cheaper options.
It has switched its recommendation to Picton Property Income, a £155m trust with 34 per cent in offices and 35 per cent in industrial property. In terms of regional allocation, the bulk of the portfolio is in London and the south east.
The trust is highly geared, with a loan-to-value (LTV) ratio of 55 per cent. However, Winterflood points out that the debt is fixed at a very low rate – 4.5 per cent – and has a weighted average maturity of 14 years.
The prospective yield is 6.6 per cent, and shares still trade at a 5 per cent discount to NAV. With the majority of its peers still trading on a premium, Winterflood says it offers good value.
UK Small Cap
Switch from Throgmorton Trust to Henderson Smaller Companies
The broker recommends buying Neil Hermon’s Henderson Smaller Companies trust, due to its long-term approach and focus on the mid cap area of the market.
The manager believes that the larger companies in the sector have greater stability and is focusing on those with global and emerging markets exposure.
Winterflood figures show that the NAV of the trust is up 488 per cent since Hermon took over in November 2002, while its Numis Smaller Companies (ex IT) benchmark index has made 3.29 per cent.
This corresponds to outperformance of 3.4 per cent per annum.
Figures from FE Analytics show that the fund has done very well for investors in recent years in a good market for smaller companies.
While the index has made 72.81 per cent over three years, the trust has made 118.8 per cent in share price terms.
Performance of trust vs index and sector over 3yrs
Source: FE Analytics
However, the trust is still on one of the widest discounts in the sector, at around 18 per cent, Winterflood says.
This is despite its strong recent record and its excellent liquidity – at £326m it is the second largest in the sector.
Winterflood also points out that the very low management fee of 0.35 per cent is another plus-point, although investors do have to deal with a performance fee, albeit it one with a cap.
According to the AIC, ongoing charges inclusive of the performance fee were only 0.54 per cent at the last calculation.
Europe
Switch from Henderson European Focus to European Investment Trust
Henderson European Focus has seen its discount tighten from 10 per cent at the start of the year to 4 per cent, leading Winterflood to switch its focus to European Investment Trust, which it describes as one of the few value plays remaining in the sector.
European Investment Trust is a £263m portfolio managed by Dale Robertson. It was known as F&C Eurotrust until a change of management in February 2010.
Our data shows it has performed roughly in line with its FTSE World Europe ex UK benchmark since then, returning 27.28 per cent while the index has made 23.01 per cent.
Performance of trust vs index since Mar 2010
Source: FE Analytics
In NAV terms it lags its benchmark by a single percentage point, according to Winterflood figures, but the broker says that given the fund’s approach, it cannot be expected to consistently perform in line with this measure.
It manager looks for long-term value in the earnings potential of companies, a different approach to his peers. The idea is to take advantage of short-termism in markets.
At its current discount of 14 per cent, Winterflood thinks it offers good value, and notes its current yield of 2.7 per cent as an extra selling point.
According to the AIC, current ongoing charges are 0.63 per cent.
Technology
Switch from Herald to RCM Technology
A number of Winterflood’s recommendations have been for trusts that focus on mid cap stocks, and RCM Technology is another example.
The manager Walter Price looks for stocks benefiting from new growth trends as well as those with high free cash-flow and earnings growth.
Data from FE Analytics shows the trust has made 58.38 per cent in share price terms over the past three years, ahead of the world technology sector.
Performance has been particularly strong over the past year, according to Winterflood figures, with NAV up 31 per cent while the Dow Jones World Technology Index has risen just 12 per cent.
Despite this surge in performance, it remains on a discount of 11 per cent, which makes it better value than its closest peer, Polar Capital Technology.
At a market cap of just £109m, the trust is less liquid than many of its peers, but Winterflood says it is nonetheless attractive for investors looking for specialist technology exposure.
