The team has concentrated on trusts that offer the possibility of a narrowing discount boosting returns, explaining that it is easier to call discounts narrowing than NAV outperformance.
Last year, 27 of the broker’s 40 tips outperformed, but it has started with a clean slate this time around.
Here we look at its favoured funds in the UK and global growth sectors.
UK Growth
The team favours Alex Wright’s Fidelity Special Values and Julie Dean’s Schroder UK Growth trusts for mainstream UK equity exposure; both are FE Alpha Managers.
Wright took over Fidelity Special Values in September of 2012, and the trust has hugely outperformed since then, returning 83.35 per cent against the 26.49 per cent of the FTSE All Share.
Performance of trust vs sector and benchmark since Sep 2012
Source: FE Analytics
The trust is a multi-cap portfolio, with 34 per cent in companies over £10bn and 26 per cent in companies below £500m.
Wright has big bets on the financials, consumer services and industrial sectors, reflecting risk-on positioning: the trust is currently 24 per cent geared. Ongoing charges are 1.23 per cent.
“Performance under Alex Wright’s stewardship has been very strong and the discount has consequently tightened to currently stand at 4 per cent,” Winterflood said.
“However, we believe that the fund could trade at a premium, reflecting its retail shareholder base.”
“At the start of this year, Alex Wright has replaced Sanjeev Shah as manager of Fidelity’s flagship open-ended fund, Fidelity Special Situations, which has assets of £2.9bn.”
“The intention is that the investment trust remains differentiated from the open-ended fund and we would expect it to have a higher smaller company allocation, thereby taking advantage of the closed-ended structure. Over time we would hope that this should lead to outperformance.”
Dean is also a newcomer to her trust, having taken over from Richard Buxton last year.
Schroder UK Growth is run according to the same business cycle process as Dean’s open-ended Cazenove UK Opportunities fund, which has recently soft-closed.
Dean looks to rotate her portfolio into different sectors of the market as the business cycle changes, maximising returns. Ongoing charges are 0.86 per cent and the trust has a 2.3 per cent yield.
“In our opinion, the business cycle approach increases the chances of the fund outperforming in different market conditions,” Winterflood said.
“The portfolio’s current pro-cyclical bias should mean that the fund outperforms in decent market conditions.”
“The shares have re-rated following the announcement of Julie Dean’s appointment as manager and now trade at parity.”
“However, given that the equivalent open-ended fund is now soft-closed and the investment trust has a lower management fee, we believe that the investment trust could justifiably trade at a premium to its NAV.”
UK Smaller Companies
For smaller companies exposure in the UK, the broker recommends Henderson Smaller Companies and Strategic Equity Capital.
The £434m Henderson Smaller Companies trust has been run by Neil Hermon since 2002, and the manager has generated strong outperformance over that time.
NAV is up 385 per cent compared with 256 per cent from the Numis Smaller Companies index. The trust has made 436.7 per cent in share price terms.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
“The portfolio is heavily exposed to the mid cap, reflecting the manager’s belief that larger companies with growth prospects offer greater stability due to their size,” Winterflood said.
“However, the fund’s performance also compares favourably to that of dedicated mid cap funds.”
“The manager also favours stocks with exposure to global growth, particularly in emerging markets.”
“Along with the rest of the UK Smaller Companies sector, the fund’s discount has narrowed over recent months and now stands at 10 per cent.”
“Given the manager’s track record and the fund’s very low management fee of 0.35 per cent of NAV, we believe that this still offers value.”
Winterflood also recommends the £89m Strategic Equity Capital fund, managed by Adam Steiner and Stuart Widdowson.
“The fund is differentiated by the managers' high-conviction private equity style approach to investment and we believe that their proactive engagement with smaller companies can add value,” Winterflood said.
“The managers’ aim is to identify good companies that can be improved, rather than trying to turn around struggling businesses, although they prefer to engage with companies discreetly and believe that aggressive activism can be counterproductive.”
“The portfolio’s focus on lowly geared, cash generative companies with leading positions in their chosen niche markets is compelling.”
“In addition, the fact that the fund’s strong performance record has been achieved without the use of significant gearing is testament to the managers’ ability.”
The discount has narrowed along with other funds in the sector, coming in to 9 per cent, but Winterflood says there is scope for further tightening.
It is also a genuinely small-cap fund, unlike many in the sector which have a high weighting to the mid caps, Winterflood notes.
Global
For global equities, the analysts recommend Scottish Mortgage, Witan and RIT Capital Partners.
Scottish Mortgage investors have received a boost with the return of James Anderson to management of the trust after a six-month sabbatical.
Despite Anderson’s recent absence, the trust has grown to become the largest on the market, with a market cap of £2.6bn, and performance has been consistently strong.
The trust has the best NAV returns of any Global Growth trust over five years, having made 170.2 per cent.
In share price terms it has outperformed the other 34 Global Growth trusts over one year, according to FE Analytics data.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
“The fund is currently biased towards the technology and consumer sectors, with the managers willing to pay high valuations for companies that they believe have strong growth prospects,” Winterflood said.
“Investors should be aware that the team’s long-term growth approach can lead to volatility over shorter periods.”
“However, we would expect Scottish Mortgage to outperform both over the longer-term and in benign market conditions.”
A more conservative choice is RIT Capital Partners, which is run largely by and for the Rothschild family.
After a period of poor performance, management was handed to Ron Tabbouche in 2012, who has cut down the number of investments and external managers used.
Over three years the trust has made just 10.45 per cent while the MSCI World index has made 30.04 per cent. The trust is on a discount of 5.8 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
“RIT Capital Partners has a strong long-term performance record, which has resulted in the fund trading on a premium for extended periods,” Winterflood said.
“However, recently the fund has lagged the stronger market conditions as a result of its defensive positioning. This has seen its discount widen, which we believe provides an opportunity.”
“This fund is differentiated from most of its global peers by its emphasis on top-down investment and it also provides access to a number of highly regarded external managers.”
Fund of funds Witan is Winterflood’s third choice in the sector.
“Following the appointment of Andrew Bell as chief executive in 2010, this fund has seen a greater emphasis on active management,” Winterflood said.
“The enhanced index trackers have disappeared from the portfolio and only three of the 11 current managers pre-date 2010.”
“In our view, the list of external managers is now very strong and this has coincided with a pick-up in performance.”
The fund made 36.05 per cent in share price terms in 2013, the third-best result in the sector, while NAV rose 36.1 per cent.
Winterflood notes that Bankers IT has seen its discount narrow to trade around NAV following RDR, thanks to its wide retail base, and says that Witan could see the same.
“Given the mechanics of a multi-manager approach, Witan is unlikely to be the best performing global fund for an extended period of time,” Winterflood said.
“However, we believe the portfolio is now well placed to generate alpha and, given its size and relatively low expenses (below 1 per cent including performance fees to external managers), that is an attractive prospect.”
“Furthermore, the fund is currently yielding 2.1 per cent and there is a policy of actively growing the dividend ahead of inflation. Witan has generated dividend increases for the last 37 years.”
