Baillie Gifford Japan Trust, Worldwide Healthcare Trust and Chelverton Small Companies Dividend Trust are the closed-end investment strategies analysts are waiting to fall before buying.
As with any investment, but particularly when it comes to investment trusts which trade on the secondary market, the price you pay is crucial to potential returns.
Indeed, analysts may often have a strong positive opinion on an investment trust but the valuation can deter them from investing if strong performance has been inflated by the market.
Below, FE Trustnet asks several analysts which trusts they are particularly positive on but cannot justify buying at current valuations.
The first is the four FE Crown-rated Worldwide Healthcare Trust run by Orbimed’s Samuel D Isaly and Sven H Borho.
The £1.2bn fund has been the best performer in the IT Biotechnology and Healthcare sector over the last five years, returning 216.64 per cent to investors, as the below chart shows.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Rathbones’ head of collectives research Mona Shah said: “We are a big fan of healthcare and the trusts that we rate the highest after being at a discount for a really long time – a good six months to the election of Donald Trump – have recently swung back to a small premium.
“We really like the Worldwide Healthcare Trust because things in healthcare are becoming much more interesting across the spectrum – so not just pharma but it also looks at biotech, devices, healthcare services, etc.
“Because you have got so much change going on I think it is really interesting to look at healthcare from a broader perspective.”
She added: “There are biotech-only trusts that I think are on a small discount but that’s too specialised, so I much prefer Worldwide Healthcare.”
The trust’s shares swung to a premium towards the end of 2016, having been on a discount of as wide as 8.9 per cent in 2015 and is currently on a 1.5 per cent premium to its NAV, according to data from the Association of Investment Companies (AIC).
“I am a value-biased investor and I really like to invest for the long term so I think if you are investing for the long term you should be able to wait [for the right price],” Shah noted.
“Given that we invest in both open- and closed-ended funds if we were desperate to get into healthcare we could buy an open-ended fund and switch into a closed-ended fund when it went to a discount.”
The trust is 10 per cent geared and has ongoing charges including performance fees of 1.38 per cent, according to the AIC.
The second trust is the £689m Baillie Gifford Japan Trust run by Sarah Whitley, which Tony Yousefian, head of investment trust research at Fund Calibre said could be in line for a de-rating.
Earlier this year, Whitley announced she will retire in April next year leaving the fund in the hands of Matthew Brett who will lead management of the portfolio along with second-in-command Praveen Kumar, manager of the the Baillie Gifford Shin Nippon investment trust.
The trust has been the best performer in the IT Japan Equities sector over one, three, five and 10-year periods, returning 305.26 per cent over the last decade.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
“Over the last few years it has been running at quite a large premium to NAV which just shows the quality of the manager as well as the asset class which has been very much in demand,” Yousefian said.
Currently the trust’s shares are on a 10.1 per cent premium to NAV, according to the latest data from the AIC.
“She has done an extremely job of running that particular investment trust but it is quite a high premium to pay,” he added. “[However] you may well see the premium on this trust close in a wee bit as Sarah Whitley is retiring in April next year.”
If this is the case, and the trust falls to par, or even to a discount, the analyst said he would be ‘filling his boots’.
“Baillie Gifford are out-and-out growth investors and tend to have this particular ethos at the heart of their process which is very much common across all asset classes regardless of which manager or area you are looking at,” he said.
“That ethos does seem to do well across all asset classes so I am quite happy that that is going to remain in place even though Sarah is exiting.
“The changeover might just present an opportunity to pick up the trust nearer to par. I would definitely buy it at par.”
With valuations where they are, Yousefian said he has been buying the open-ended version of the trust.
“There is just something in me that doesn’t want to pay more than a pound for a pound, especially where you have got exactly the same investment process available to you albeit on an open-ended basis,” he said.
“Having said that I would definitely in the long term always prefer to use close-end vehicles to open-ended because the gearing does really help, especially if the manager knows what they are doing.”
The trust is 11 per cent geared, and has an ongoing charge of 0.88 per cent, according to the AIC.
Chelverton Small Companies Dividend
The final fund is the five crown-rated Chelverton Small Companies Dividend fund, which has been the best performing trust in the IT UK Equity Income sector over one, three and five years, and is the second best fund in the sector over the last decade.
Run by David Taylor and David Horner, the £47m investment company has returned 158.21 per cent over the last 10 years, significantly ahead of the FTSE Small Cap ex IT benchmark and sector, as the below chart shows.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
Alex Paget, research analyst Kepler Trust Intelligence, said the trust “is a really interesting offering but looks relatively expensive on its small premium to NAV”.
The trust is in a very similar fashion to their popular open-ended MI Chelverton UK Equity Income fund, with a focus on yield – they only buy stocks yielding more than 4 per cent and will automatically sell if a stock’s yield were to fall below 2 per cent.
“They argue the small-cap end of the UK equity market is significantly under researched and, thanks to their experience and knowledge of the space, they can build a portfolio of smaller companies that offers attractive capital and income growth but are lowly valued,” Paget said.
“It is obviously a highly volatile and highly geared trust, so though it has delivered significant outperformance over the years – it has been a rocky ride for investors.”
One benefit for investors is that, due to its small-cap approach, it is lowly correlated to its income-focused peers, though it could be considered closely correlated to the direction of the UK economy.
“As such, though a 0.04 per cent premium is unappealing at this point in time (it has never usually traded on premium for long), if for whatever reason the shares were to de-rate out to its longer-term average of 8 per cent or more, then this would look attractive for long-term income investors,” explained Paget.
“Though that seems like a large de-rating, discount volatility has been a major feature of this trust so any correction in the market could quickly spark a more opportune entry point.”
The trust is 17 per cent geared and has a dividend yield of 3.1 per cent, according to the AIC. Currently there is no charges figure available.