The trusts that Kepler's analysts are backing this year

I think I can speak for everyone on the planet when I say good riddance to 2020. However, not wanting to dwell on the past and instead looking to the future, in this article six analysts at Kepler Trust Intelligence, a leading research company in the investment trust space, discuss their standout opportunities for the year ahead, including the catalysts for growth and the potential for investor returns!

Pascal Dowling – Invesco Perpetual UK Smaller Companies

I choose Invesco Perpetual UK Smaller Companies (IPU) as my top performer for 2021. The UK has been at the bottom of the heap for investors for a long time, and the true impact of the coronavirus in economic terms is yet to be felt here as elsewhere, but we are, in my view, in better shape than most to move forward once the vaccine becomes widespread, with the vast, insoluble uncertainty that was the Brexit deal now resolved.

Against that backdrop, in my view, IPU’s discount (circa 8 per cent) could be a significant attraction for investors, having been savaged in 2020 after a long period of trading at a premium to its peers. While that discount has come in somewhat recently, we believe that the fundamental factors meriting its historic premium rating relative to peers have not changed. The trust continues to offer a relatively secure dividend stream which offers a significant yield premium to peers. Certainly, the short-term performance has not matched some ‘growthier’ peers. However, investors mustn’t forget that this is likely a characteristic of the conservative, risk-averse investment process which, in our view, has enabled the managers to deliver on their objective of top quartile performance but with below-average volatility over the long term.

Growth trusts were in favour last year, so it is hard to find many with tempting discounts. However, in my view, Oakley Capital Investment (OCI) could fit the bill and is my pick for 2021. OCI is a listed private equity trust that has a highly concentrated portfolio exposed to the sectors that manager Oakley Capital focuses on; technology, education and consumer. In their most recent report, the team stated that 12 out of their 15 companies are forecast to meet or beat their budget for 2020, or have returned to budgeted run rates in H2. In our view, this gives reassurance that the majority of the portfolio should prove resilient through 2020/21.

OCI trades on a discount to NAV of 19 per cent currently, but this is to historic valuations (June 2020). Equity markets have moved on considerably from here, and peers in the listed private equity sector have also reported strong valuation gains and realisation activity since June. This gives us confidence that the real discount is likely to be wider than 19 per cent. We believe that OCI’s historic performance, its narrow sector focus in areas which have proved resilient to Covid-19, and its significant cash balances giving it plenty of room for manoeuvre. The upcoming NAV announcement at the end of January (30 December valuations) should give more colour on how the portfolio has performed over the second half of 2020 and could be a catalyst towards a re-rating.

Risk appetite has been picking up in the world and the market seems optimistic about 2021. I am going to follow Nick Train’s advice and be biased towards optimism. In my view, Henderson Opportunities Trust (HOT) could do very well this year. It is a significantly geared portfolio of UK stocks biased to the mid- and small-cap space. James Henderson and Laura Foll have built a portfolio balanced between Covid winners and Covid losers, with value and growth exposure. Historically it has done extremely well in cyclical UK recoveries, and its discount has remained wider than many of its peers, meaning there is good potential for the share price to catch up next year in my view. Once the vaccine is rolled out, I expect the UK to do well and HOT is well placed to benefit.

My pick for 2021 is Golden Prospect Precious Metals (GPM). My starting point is that we entered a multi-year bull market for commodities in late 2015. Fiscal repression is coming and the Fed will hold bond yields at (increasingly) negative inflation-adjusted levels. This provides a strong boost to gold spot prices. Yet silver looks even more attractive on a relative basis. The silver to gold ratio suggests support to silver is cheap. ‘Green’ infrastructure spend will require vast amounts of silver, and Goldman Sachs and Citi have both published very bullish estimates on the silver spot price. S&P exploration reports, as well as more anecdotal evidence, continue to suggest supply discipline in exploration budgets. With mining majors exhibiting substantial positive free cash flow, M&A activity around junior miners could be an attractive way for them to increase production, which should benefit GPM.

In 2021, whilst there may be some volatility, looking at underlying gold and silver miners, the correlation to rising spot prices is supremely compelling to me.

My stock pick for 2021 is Miton UK MicroCap Trust (MINI). Launched in 2015 and managed by small caps veteran Gervais Williams. It invests predominantly in a portfolio of smaller UK companies, typically with a market capitalisation below £150m. The trust has been the strongest performer in the AIC UK Smaller Companies sector over the past one month, six months and one year. Despite this, it trades on a 13.1 per cent discount, relative to a sector average of 2.8 per cent.

I believe that there is plenty of room for the trust to run in 2021, given the underperformance of the UK equity market since 2016. The resolution of Brexit is likely to produce a significant rebound in the UK economy, particularly in the small-cap area, allowing the trust to fully participate both in terms of NAV and the narrowing of the discount.

My choice for 2021 is Scottish Mortgage Trust (SMT).

SMT had a stellar year in 2020 with a NAV return of 108 per cent. but I still see strong tailwinds supporting this growth-stock champion. In my opinion, the biggest factor underpinning the expensive valuations for many of SMT’s holdings is the rock bottom yields bonds offer currently, which reduces the opportunity cost for holding equities.

I see little chance for a 2021 economic recovery sufficient to push yields higher, especially given the ongoing need for lockdowns.

The prospects of SMT’s underlying holdings, the majority of which are technology names, remain good. While Covid-19 has led to a huge surge in demand for many of their services, I do not believe it will simply dissipate with its eventual resolution. Even Tesla, SMT’s largest and possibly most optimistic holding, only missed its production target by 50 cars, surpassing analyst expectations in the process.

Pascal Dowling is a partner at Kepler Trust Intelligence. The views expressed above are his own and should not be taken as investment advice.