Scottish Mortgage, Edinburgh Investment Trust and Templeton Emerging Markets are among five picks from the closed-end fund space offering investors greater diversification, according to Hargreaves Lansdown’s Richard Troue.
Troue, head of investment analysis at fund platform Hargreaves Lansdown, said the investment trends that were prevalent in markets last year have so far continued in 2018.
He said. “Companies with the potential to disrupt traditional industries remain in favour, while the industries they are disrupting are largely ignored by investors.
“Meanwhile, concern over Brexit is weighing heavily on the UK, and US and European companies are seen as having better prospects.”
However, Troue warned that it is unlikely these trends will continue to dominate markets over the long term and, as such, investors should seek out greater diversification.
Troue added: “Of course, identifying turning points in advance is practically impossible. For most investors it’s important to maintain a balanced approach.”
As such, Troue has picked out five investment trusts that could help investors aiming to build a more diversified portfolio.
Scottish Mortgage Investment Trust
First on Troue’s list is the five FE Crown-rated Scottish Mortgage Investment Trust, overseen by Baillie Gifford’s James Anderson and Tom Slater.
Performance of trust vs sector & benchmark over 10yrs
Source: FE Trustnet
The £6.5bn trust is popular among advisers and invests in global companies that have the potential to dominate their industries and includes companies, including such names as Amazon, Tesla and Facebook among its largest holdings.
Over ten years, Scottish Mortgage Investment Trust has made a total return of 358.91 per cent compared with average sector trust’s 158.55 per cent gain and beating the benchmark by 184.77 percentage points.
Troue said the managers have the flexibility to invest in emerging markets, smaller companies and unquoted businesses, “all of which add risk in this adventurous investment trust”.
“It’s no surprise to see companies like Amazon, Tesla and Facebook among its largest investments, along with Chinese e-commerce and technology companies such as Baidu and Tencent,” said Troue.
“They have performed well in recent years, although some now question whether investors have got ahead of themselves, and after such a strong run, a setback can’t be ruled out.”
The trust has ongoing charges of 0.44 per cent. It is currently trading at a premium of 1.7 per cent and is 7 per cent geared, according to data from the Association of Investment Companies (AIC).
Personal Assets Trust
The second closed-end fund on Troue’s list is the £879.6m Personal Assets Trust run by FE Alpha Manager Sebastian Lyon since 2009, which he said is at the “other end of the spectrum”.
The trust’s investment objective is to protect and increase the value of investors’ capital over the long term.
Troue said there are four main elements to the trust: large-cap stocks, US and UK inflation-linked governments bonds, gold bullion and cash.
Lyon’s large-cap stocks often have dominant market positions, selling products that millions buy regularly. Elsewhere in the portfolio, US and UK inflation-linked government bonds provide inflation protection; gold bullion acts as a store of wealth; finally, a quarter of the fund is held in cash.
“This balanced approach is likely to look dull when stock markets are rising rapidly, but it comes into its own when they fall,” said Troue.
Performance of trust vs sector under Lyon
Source: FE Trustnet
Under Lyon, the trust has returned 119.39 per cent compared with a 106.12 per cent gain for its average peer in the IT Flexible Investment sector.
The trust has ongoing charges of 0.95 per cent, trades at a premium of 1.3 per cent and has no gearing, according to the AIC.
Edinburgh Investment Trust
Troue has picked out UK equity income strategy Edinburgh Investment Trust run by FE Alpha Manager Mark Barnett and deputy manager James Goldstone, as his third trust for 2018.
“We think the negative sentiment towards the UK is overdone,” said Troue. “And while it could still persist for a while, it has thrown up some opportunities for contrarian investors, specifically companies reliant on the domestic economy and in out-of-favour sectors, such as healthcare and financials.”
“Just over half the trust is invested in larger UK businesses, and almost 30 per cent in the more domestically-focused FTSE 250 index,” he said. “The manager also has the flexibility to use derivatives and invest in smaller companies, which adds risk. “
Troue noted that the fact many of these businesses are unloved has seen the trust’s discount to NAV widen more recently compared with its peers.
The trust has a solid long-term track record, having previously been managed by FE Alpha Manager Neil Woodford, but it has struggled in recent years.
Since Barnett took over the trust in 2014 following Woodford’s departure, it has returned 37.65 per cent compared with a 36.94 per cent gain in the FTSE All Share index and 30.89 per cent return for the average IT UK Equity Income trust.
Performance of trust vs sector & benchmark under Barnett
Source: FE Trustnet
The trust has an ongoing charges of 0.57 per cent and a yield of 3.78 per cent. The fund is currently trading at a discount of 8.4 per cent and is 10 per cent geared, according to data from the AIC.
Templeton Emerging Markets Investment Trust
For Troue’s fourth pick he has turned to emerging markets, highlighting the £2.2bn Templeton Emerging Markets Investment Trust (TEMIT), managed by Carlos Hardenberg, Chetan Sehgal and outgoing veteran investor Mark Mobius.
“It’s hard to think of another investment area that offers so much diversity, variety and opportunity,” said Troue. “From a young, educated workforce across developed Asia, to rising household income in China and India, and natural resources in Brazil and Russia.”
“The manager is positive on the prospects for technology and consumer-focused companies, as household incomes grow and emerging technology companies develop branded products.
“It combines household names like Samsung Electronics, alongside lesser-known, higher-risk small and medium-sized companies.”
Troue highlighted its strong performance in recent years, with Hardenberg having taken the reins in October 2015.
Under Hardenberg, the trust has generated a total return of 110.18 per cent compared with a 76.36 per cent gain for the MSCI Emerging Markets benchmark index and a 58.83 per cent return for the average IT Global Emerging Markets trust.
TEMIT has ongoing charges of 1.22 per cent. It is currently trading at a discount of 10 per cent and has no gearing, according to the AIC.
JPMorgan Indian Investment Trust
Sticking with emerging markets, Troue’s last pick is the £811.8m JPMorgan Indian Investment Trust, managed by Rukhshad Shroff and Rajendra Nair.
“India offers tremendous potential, but it is a more exotic and higher-risk area for investment,” he explained.
“The country is in the midst of change, and elected pro-business candidate Narendra Modi as prime minister in 2014, who aims to streamline the business environment and lift hundreds of millions out of poverty.
He added: “Indian companies are supported by a young and educated workforce, and an increasingly affluent population: it is taking its place as an IT and engineering powerhouse.”
Troue said the trust has a bias towards domestically-focused companies, such as banks and financial, and is positive on automobile companies. The pair also seek out well-run companies “that can take market share from state-run enterprises”.
Performance of trust vs benchmark over 10yrs
Source: FE Trustnet
As the above chart shows, over 10 years the trust has delivered a total return of 81.95 per cent compared with a 70.18 per cent gain for the MSCI India index.
The trust has ongoing charges of 1.22 per cent. According to the AIC, it is trading at a discount of 9.5 per cent and is 8 per cent geared.