(Trusts marked * are corporate broking clients of Winterflood Securities.)
Winterflood analysts have added 15 investment trusts and dropped a dozen more in their New Year review of their closed-end fund recommendations.
Simon Elliott, head of investment companies research, said the overhaul followed a difficult year for the broker’s model portfolio of investment companies, which suffered badly in the first quarter pandemic crash but recovered strongly at the end of the year to end 2020 9.5% up.
This beat the 3.6% gain in the composite benchmark Winterflood uses to measure its performance. Since the portfolio began in 2016 it says it has achieved an average annual return of 12.9%, also ahead of the 9% annualised gain in the index.
The model portfolio now contains 38 investment companies, up from 34 a year ago, divided into two broad types: ‘funds managed by proven managers with strong long-erm performance records and funds that offer a value opportunity’, Elliott said.
Murray’s Luke a dividend ‘torchbearer’
In UK equities, Winterflood has increased its recommendations from six to eight to capture the ‘substantial opportunity’ it sees in a stock market that has endured prolonged underperformance since the Brexit referendum four years ago.
Aurora (ARR ), the first of two additions, is a concentrated, deep value portfolio whose exposure to the domestic economy Winterflood expects will benefit from improved investor sentiment to the UK after the signing of a Brexit deal with the EU.
Odyssean* (OIT ), which like rival Strategic Equity Capital (SEC ) takes a private equity style approach to investing in small companies that can be improved, is the second addition. ‘We see this as less of a beta or UK recovery play and more of a bet on the managers’ ability to invest in quality companies on attractive valuations,’ said Elliott.
In UK equity income, the analysts have switched from Dunedin Income Growth (DIG ) to sister trust Murray Income (MUT ) after its ‘transformational merger’ with Perpetual Income & Growth* (PLI). Elliott declared Charles Luke (pictured), manager of the now £1bn trust as ‘a natural successor to Job Curtis, the veteran manager of City of London (CTY ) as the torchbearer for the UK Equity Income investment trusts that offer dependable and growing dividends’.
In UK smaller companies, Winterfloods has replaced Harry Nimmo’s Standard Life UK Smaller Companies* (SLS ) with Neil Hermon’s Henderson Smaller Companies (HSL ) on valuation groups. SLS sits on a tight 3% discount compared to HSL’s 8% deficit to NAV.
Witan replaces Bankers
In international equities, Winterflood has swapped Bankers (BNKR ) with global multi-manager rival Witan (WTAN ) whose difficulties in the first half of last year had sped up changes in its manager line-up that were already improving performance. ‘While it has already been partially re-rated, we can envisage there is more to come,’ Elliott commented about the £1.8bn trust currently on a 5% discount.
In Europe, the broker’s analysts have switched from Henderson Eurotrust (HNE ) to stable mate TR European Growth* (TRG ). Although HNE enjoyed a good year under new fund manager Jamie Ross, Elliott said the Ollie Beckett managed TRG offered ‘greater opportunity’ with its small and mid-cap portfolio likely to benefit from an economic recovery, particularly as the shares looked good value on a discount of 11% below net asset value. HNE stands on a 7% discount.
Similarly, in Japan former sector leader Baillie Gifford Japan (BGFD ) has made way for JPMorgan Japanese (JFJ ) which Winterflood believed offered better value on a small discount compared to the former’s 8% premium. ‘JPM Japanese has developed a strong track record under Nicholas Weindling and Miyako Urabe and shares many of the growth-oriented investment themes of its closest peer,’ Elliott explained.
In Asia, Elliott reversed a switch he made a year ago, dropping Asia Dragon Trust* (DGN ) in favour of Schroder Asian Total Return (ATR ), whose small premium he believed was justified by its strong performance and policy of limiting its discount to 5%. ‘In our opinion, the fund’s mandate is attractive in the current environment given its ability to protect investors’ capital in difficult market conditions,’ he said.
A premium re-rating in the shares of JPMorgan Asia Growth & Income (JAGI ) since it adopted a higher dividend four years ago has prompted Winterflood to try and repeat the same trick, replacing it with Invesco Asia Trust (IAT ) which followed suit with an ‘enhanced’ distribution policy last August but still languishes on a 10% discount.
Augmentum Fintech (AUGM ), the last of the changes in this category, has been added on a high 17% premium. Despite a major re-rating after a difficult start to 2020, Elliott said this reflected the progress being made in the portfolio of unquoted financial technology disrupters, which he thought would produce one flotation or buyout to crystallise gains for shareholders this year.
Elsewhere, Harbourvest Global Private Equity (HVPE ), Standard Life Private Equity* (SLPE ), JPMorgan Emerging Markets (JMG ), Templeton Emerging Markets* (TEM ), Martin Currie Global Portfolio (MNP ) and Scottish Mortgage (SMT ) were also retained.
Bonds and property
Winterfloods has trimmed its bonds recommendations from five to four, removing CVC Credit Partners European Opportunities* (CCPE ) and TwentyFour Income (TFIF ) and adding NB Global Monthly Income (NBMI ) after it abandoned its focus on floating rate debt last year. Elliott said its’ new strategy offers interesting exposure to a broad range of credit sectors and we see potential for the fund to be re-rated as its monthly dividend increases following the transition.’
In commercial property the analysts made two changes. Among mainstream, heavily discounted UK real estate investment trusts, they now prefer Standard Life Investments Property Income* (SLI ) over BMO Commercial Property Trust (BCPT ) for its higher industrial weighting, lower retail exposure and better dividend prospects.
Among specialist UK Reits, the broker plumped for Civitas Social Housing (CSH ) over rival Residential Secure Income (RESI ) because the dividend behind its prospective 5.1% yield is fully covered. ‘Civitas offers an interesting opportunity for investors looking for secure income from a UK real estate portfolio and we believe that the portfolio’s long-term, inflation-linked leases are appealing,’ Elliott argued.
Tritax Eurobox (EBOX) and TR Property (TRY ) had also been retained, he said.
Capital Gearing ousts RIT
Winterflood has upped the number of defensive trusts whose low volatility or correlation with mainstream stock markets make them attractive safe havens. The addition of Greencoat UK Wind (UKW ) alongside BBGI Global Infrastructure* (BBGI ) comes as the renewables fund trades on a high but reduced premium of 11% over NAV. ‘Electricity prices have recovered since their low in March 2020 and this should be positive for the fund, which offers an attractive yield and is expected to cash cover its 2020 dividends 1.3 times,’ Ellott assured.
Shares in the Rothschild-backed RIT Capital Partners (RCP ) have been too volatile for a capital preservation fund so Winterflood has opted for Capital Gearing Trust (CGT ), which has grown to £610m on the back of its zero-discount policy and shrewd asset allocation. ‘The fund has undoubtedly been one of the success stories of the sector over the last few years,’ said Elliott.
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