Numis: Six trust tips for a bet on rerated growth

Better late than never, Deutsche Numis analysts review their annual investment company recommendations, adding six listed funds and removing three.

Broker Deutsche Numis has added six investment companies to its list of recommendations as it tilts towards growth and emerging markets in anticipation of a reduction in interest rates this year. 

Numis analyst Gavin Trodd said that while the timing and extent of interest rates cuts were uncertain, the prospect of reduced borrowing costs would alleviate the downward macroeconomic pressure on markets and asset prices.

He believes that would give active fund managers and stockpickers the scope to outperform their market benchmarks.

Improved market sentiment could also lead to a rerating in investment companies (with the exception of private equity giant 3i Group), whose shares have fallen 16% below net asset value (NAV) – far worse than the long-term average discount of 7%.  

RTW Biotech Opportunities (RTW )

Numis has added the former RTW Venture as a ‘core buy’ (meaning it expects a good return in the next 12 to 18 months) after its merger with Arix Bioscience swelled its assets to more than £500m and its market value to £400m given the shares’ 29% discount. That’s good to see as we also picked the closed-end fund last month.

Trodd said the team was ‘enthused’ about the prospects for biotech after a bruising bear market over the past two years. RTW, a Numis corporate client, joins the broker’s existing recommendations for International Biotechnology (IBT ) and Worldwide Healthcare Fund (WWH ) on the basis that fundamentals in the sector are good, with mergers and acquisitions and medical advances pushing up share prices and long-term demand remaining strong from ageing Western populations.

Picking up on the argument expressed by Migo Opportunities’ (MIGO ) Nick Greenwood when he bought RTW last year, Numis said biotech had a history of outperforming in recessions, although a pre-downturn rally had not happened yet, leaving prices that were ‘overly pessimistic’.

New York-based fund manager RTW was formed in 2009 to take a science-based approach to picking potentially transformational companies, some of which it helped create, including its top two companies – Rocket Pharmaceuticals (17%) and Ji Xing (8%).

Trodd said the five-year-old Guernsey investment company was ‘well placed to capitalise on market dislocation in the biotech sector, particularly within small caps’.

Smithson (SSON )

The growth selloff of the past two years has been painful for Smithson fund manager Simon Barnard but Numis analysts believe he has learned his lesson. They have added the previously popular, £2.5bn global mid-cap portfolio as another ‘core buy’ as the shares trade on a wide 12% discount.

Launched in 2018, Smithson enjoyed impressive returns up to the end of 2021 but has been challenged by a style rotation in stock markets from growth to value and poor sentiment towards smaller companies. This caused its share price to plunge from a £20.20 peak to a low of £11.55 in October 2022, recovering to £13.85 today.

In addition, Trodd said, it was ‘caught holding several stocks with high valuations, as well as some stocks with small operational issues that should have acted as red flags’.

‘Having the flexibility/willingness to sell when the business case changes on valuation grounds is healthy,’ said the analyst, believing Barnard had maintained the core of his investment process.

Allianz Technology (ATT )

The broker has changed its tech fund recommendation after a year in which the sector shot to prominence amid the fervour for AI.

Allianz Technology replaces Polar Capital Technology (PCT ) as a ‘core buy’, with the analysts impressed by the job fund manager Mike Seidenberg has done since taking on the £1.3bn trust from long-standing predecessor Walter Price in June 2022.

Although the £3.4bn Polar Capital Technology was Numis’ best performer last year, with NAV soaring 45.8%, Trodd said ATT’s greater focus on mid-cap stocks should benefit as the AI rally broadens away from the Magnificent Seven stocks. While the trust holds mega-caps such as Microsoft, Nvidia, Apple, Alphabet, Meta and Amazon, its positions are underweight the quantities in its benchmark, the Dow Jones World Technology index. 

In addition to AI, the concentrated portfolio of 40 to 50 stocks focuses on several themes, including the internet of things, cloud computing and cybersecurity, and benefits from a well-resourced, on-the-ground team in San Francisco.

‘It has been a strong run for the tech sector,’ said Trodd, ‘but for those looking to access this specialist asset class, Allianz Technology is an attractive option, with an active, high-turnover, stock-picking approach focused on mid/large caps (underweight mega-caps) with exposure to attractive growth themes.’

He added that Seidenberg ‘has performed well since taking over in a difficult period for active management’, with ATT’s NAV up 49% against 45% from PCT. The shares stand nearly 13% below NAV, which is slightly wider than its one-year average discount.

AVI Global (AGT )

Numis analysts believe this £1bn investment trust, which won its second Citywire performance award last November, offers a compelling way to play a potential rerating in the sector, adding it as another ‘core buy’.

Asset Value Investors fund manager Joe Bauernfreund hunts out overlooked and underresearched stocks that have a catalyst to narrow their discount, while his activist leanings ensure he ‘works to improve corporate governance to unlock value’, said Trodd.

The trust is 30% invested in investment companies, where it is focused on private equity funds Oakley Capital (OCI ), Pantheon International (PIN ) and Princess (PEY ), whose discounts are particularly wide.

Key to Numis’ thesis is the trust’s ‘double discount’, with its portfolio holdings standing on an average discount of 33% and its own shares trading 9% below asset value. Trodd said this creates significant value that could be unlocked when market conditions and sentiment improve.

With AGT’s total underlying returns on net assets amounting to 75%, or 11.6% a year, since 2019, compared with 66%, or 10.7% annualised, from the MSCI AC World index, the analyst said: ‘It has outperformed the MSCI AC World over one, three and five years, which we consider impressive given the nature of the portfolio and limited exposure to mega-cap tech.

‘The shares currently trade on about a 9% discount to NAV, while it also benefits from a tight trading spread (0.3%) and a consistent buyback programme.’

BlackRock Frontiers (BRFI )

Numis takes a quote from Templeton Emerging Markets (TEM) co-manager Andrew Ness that his sector is ‘underowned, underestimated and undervalued’ to make a recommendation for this rival £287m trust focused on ‘frontier’ countries that have yet to be accorded full ‘emerging’ status, such as Indonesia, Saudi Arabia and Peru.

The analysts acknowledge that emerging markets have underperformed developed markets for about a decade as the latter have benefited from the explosion in tech stocks and the former have been held back by a strong dollar. However, with the asset class trading at a 35% discount to developed markets in terms of price to historic earnings, they believe this is a good time to add exposure.

They said investors attracted to out-of-favour markets should appreciate the efforts of BlackRock Frontiers managers Sam Vecht, Emily Fletcher and Sudaif Niaz in rooting out underresearched opportunities.

‘The managers look for economies where growth can be determined by the domestic outlook and that can grow independently of broader global economic conditions. This leads to a unique, well-diversified portfolio spread across a range of frontier markets,’ said Trodd.

The analysts praised the fund’s track record as exceptional. Since launching in December 2010, it has generated total underlying growth of 115.6%, equivalent to 6% a year. This beats the 27.7%, or 1.9% annualised, from the MSCI Emerging Markets index and the 46%, or 2.9% a year, from the MSCI Frontier Markets index in US dollar terms. The trust also won a Citywire performance award in November for its three-year risk-adjusted returns. Its shares stand on a 7% discount, slightly narrower than the one-year average of 8%.

JP Morgan Indian (JII )

The second Numis corporate broking client to make the six new additions is the first ‘trading buy’. The analysts removed the underperforming trust as a ‘core buy’ in January 2022 but say performance has improved since the appointment of a new team in September of that year.

While fund managers Ayaz Ebrahim, Amit Mehta and Sandip Patodia continue to turn around the £671m trust, the broker believes the downside risk of a widening in its 18% discount is limited by the presence of a five-year tender offer.

The team has until September next year to lift its five-year returns above the MSCI India index. If it fails, the company will buy back a quarter of the shares at a much narrower discount, usually about 2% below NAV, providing a decent margin over the current valuation. 

Trodd said the outlook for India looks compelling, which is why Numis also continued to recommend its ‘core buy’ Ashoka India Equity (AIE ). 


Joining Polar Capital Technology in the departure lounge is Abrdn-managed Asia Dragon (DGN ), which had somehow remained on the recommended list since 2011. Trodd said the £576m trust, which at the end of last year grew its assets via a merger with stablemate Abrdn New Dawn, has ‘been a perennial disappointment and, in retrospect, we should have removed it from the list a long time ago’.

With the trust the worst performer in its Asia Pacific ex-Japan and Australia equity peer group over one, three, five and 10 years, Trodd said: ‘We lack conviction that this is going to improve, particularly given continued restructuring at Abrdn.’

Baillie Gifford UK Growth (BGUK ) was added in 2018 when Baillie Gifford took over the £243m trust from Schroders, which prompted a rerating of the shares. The trust then traded at a premium when growth was in vogue during 2020 and 2021. However, a rotation to value and negative UK sentiment have seen the discount widen to 15%, while fund managers Iain McCombie and Milena Mileva have suffered company disappointments, including FarFetch and Just Eat.

While Trodd is ‘more optimistic on the outlook for the UK than some participants’, he said the Numis team believes growth opportunities are better captured within UK small companies, where the analysts continue to recommend maintained Henderson Smaller Companies (HSL ) and Aberforth Smaller Companies (ASL ).

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