Three well-managed investment trusts to buy now
Professional investor Peter Walls' investment strategy is simple: buy well-managed investment trusts. Here, he tips three great-value trusts to buy now.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Peter Walls, fund manager, Unicorn Mastertrust Fund.
My investment strategy is simple: I buy well-managed investment trusts. The reason for this is pretty straightforward. Over the long term, investment trusts generally outperform their unit trust rivals. Recent research from broker Winterflood, for example, shows that investment trusts outperformed in all nine of their major sub-sectors over the last ten years.
Why? One of the many advantages of the investment trust structure is that it allows the fund manager to take a long-term view on investments without having to deal with the unpredictable cash inflows and outflows associated with an open-ended fund. Investment trusts are therefore better placed to invest in less liquid assets, such as smaller companies and private equity.
Indeed, investment trusts that specialise in UK smaller companies have produced market-beating returns in recent years, yet continue to trade at generous discounts to net asset value. Competition within the peer group is fierce, with many individual fund managers boasting excellent long-term records.
A good example is Neil Hermon, manager of Henderson Smaller Companies investment trust (LSE: HSL) since November 2002. At 31 May 2012 the trust boasted an overall increase in net asset value total under Mr Hermon's tenure of 228.3%, equating to a compound annual return of 14.1%. Since the end of May the asset value has risen by a further 14.8%. You might think performance of this magnitude would be rewarded with a decent market rating, but the shares can be bought a discount of almost 20% to net asset value!
Even greater value is to be found in the listed private equity' fund sector, where discounts to net asset value currently average 30%. F&C Private Equity Trust (LSE: FPEO), which offers great diversification as a fund of private-equity funds, is a case in point. This trust has recently differentiated itself from the majority of its peers following changes to the Companies Act rules. These increase the ability of investment trusts to make dividend distributions.
As a result the trust is aiming to return 4% of its net asset value per annum to shareholders by way of dividends in addition to its normal revenue. While this strategy may not suit all types of investor, the combination of a 30% discount to net asset value and a 6.1% yield at today's share price certainly appeals to me.
Investment trusts provide hours of fun for anoraks like me, as their communications with shareholders can be both informative and thought-provoking. For example, the latest interim report from North Atlantic Smaller Companies investment trust (LSE: NAS) highlights that four of the underlying unquoted investments it holds are up for sale and that if these sales were to complete there would be a substantial upside. The report notes that the subsequent impact on its net asset value and cash position would be particularly significant.
That said, there can be no guarantees whatsoever that despite all of these businesses being highly profitable with market-leading positions any transactions will in fact close out. However, as an investor in the trust I draw comfort from the untapped value embedded within the portfolio and believe I can afford to be patient, given the 33% discount to net asset value at which the shares currently trade.