Walls, who manages the five crown rated Unicorn Mastertrust fund, says the huge narrowing in discounts across the more popular sectors of the investment trust universe means it is the only trust he thinks is worth buying at current valuations.
The manager says that as equity markets have rallied in recent months it has created a “double-whammy” effect, where not only are the underlying assets overbought but the majority of investment trusts that hold them are now on a premium.
“It is general with markets at the moment, but there isn’t great value around,” he said.
“There have been consecutive 11 months of the UK market going up and a lot of those returns are due to quantitative easing and the amount of money sloshing around.”
“It has had a real impact so I am not surprised that there has been a lot of discount narrowing.”
Walls says his contrarian investment philosophy means he has never bought a trust on a premium to its NAV.
“I think the reason I don’t buy on a premium, though it might seem slightly arrogant, is because I see myself as a contrarian investor,” he said.
“Normally when a trust is trading on a premium it is because its NAV performance has been very good, so more people want to get in. Unfortunately, that sometimes means that all those returns have already gone.”
“Inevitably, capital will be allocated to where the best returns are. It gives investors comfort because they feel that it will be able to maintain performance, even though there may be multiple health warnings from the management teams.”
Walls says the TR Property Investment Trust is the only closed-ended fund he can find that is trading on a decent discount he thinks can narrow going forward.
“The only fund I have bought in recent times has been the TR Property Investment Trust, which is trading on a 15 per cent discount,” he said.
“The commercial property market has been a disaster area for the last five years and expectations on capital haven’t been very high.”
“However, it is a very good and well-managed trust which has a decent discount and a reasonable yield.”
According to FE Analytics, the TR Property Investment Trust has returned 47.32 per cent over five years while its benchmark – the FTSE EPRA NAREIT Developed Europe index – has returned just 17.98 per cent.
Performance of fund versus index over 5yrs
Source: FE Analytics
The closed-ended fund – which is co-managed by Marcus Pharye-Mudge and Alban Lhonneur – has also returned 51.37 per cent over one year, beating its benchmark by 10 percentage points in the process.
Walls says that a lot of investors are showing interest in the investment trust, which should cause its wide discount to come in.
“It is interesting to me that a number of other people have expressed interest in property and many managers have added positions to their portfolio.”
“The trust’s NAV performance has been pretty good and that suggests to me that the discount could narrow substantially”, he added.
FE Alpha Manager Bill McQuaker have has moved into commercial property funds to help maintain income given the poor outlook for the bond market, while the Jupiter Merlin team have started to look at the options in the sector.
However Walls has bought the closed-ended fund in the hope for capital appreciation.
The pan European TR Property primarily invests in property shares; however 7.4 per cent of the portfolio is weighted in UK direct property.
The investment trust’s largest regional position is in the UK, making up 35.3 per cent. TR Property also holds 19.6 per cent in France and 12.6 per cent in Germany.
Its largest individual holding – making up 11.4 per cent of the portfolio – is in Unibail-Rodamco, which is the largest commercial real estate company in Europe.
TR Property Investment Trust has a headline yield of 3.24 per cent and is currently geared at 8 per cent.
The closed-ended fund has an ongoing charge of 1.04 per cent and doesn’t implement a performance fee.
Walls’ Unicorn Mastertrust has been a top quartile performer in the IMA Flexible Investment sector over one, three, five and ten years. It has been the fifth ranked fund in the sector over the decade with returns of 200.01 per cent.
Performance of fund versus sector over 10yrs
Source: FE Analytics
The £6.3m fund has an ongoing charges figure (OCF) 1.86 per cent and requires a minimum investment of £2,500.