As a result of wealth manager consolidation and the growth of centralised buy lists, many smaller investment trusts are being overlooked by fund buyers. The accepted wisdom is that trusts with assets below £200m are unlikely to offer sufficient liquidity for inclusion in model portfolios. But by focusing only on those trusts that are large and ultra-liquid, advisers may be missing out on opportunities in potentially rewarding niches.
We have found a selection of investment trusts with market capitalisations below £200m. We have excluded those with assets below £20m, as many of these are in the process of realisation, and by ranking them in order of five-year NAV total returns, we have also removed those with less than a five-year track record.
What remains is an interesting combination of single-country emerging markets funds, UK smaller companies specialists and some smaller global funds. Almost half the funds listed have returned more than 100 per cent (on a NAV basis) over five years and all have produced double-digit returns over three years, although the post-Brexit volatility has seen the majority of UK small-cap funds fall into negative territory over the past 12 months.
One of the problems faced by smaller investment trusts is fixed costs weigh more heavily on a smaller pool of assets when translated into a percentage ongoing charge. However, more than half the trusts listed have an ongoing charges figure of 1.5 per cent or below, making them broadly competitive with the rest of the market. The stated NAV performance is also net of fees.
Another potential difficulty – and the main stumbling block for large investors – is availability of stock. The average daily trading volume for the 20 trusts is a little over 2,000 shares, although within this there may be days when hundreds of thousands of shares are traded, and days when there are no trades at all. Fund of funds managers with a focus on the closed-end sector report that by working closely with brokers they have been able to build stakes in smaller trusts,
although when there are few sellers in the market, any purchasing activity may see discounts narrow sharply.
But while they may not be suited to a one-size-fits-all approach for a large number of clients, smaller trusts have something to offer in terms of more niche exposure. Aberdeen New Thai*, for example, is the only investment trust focusing on Thailand. Over 10 years it has produced the highest NAV performance in the group, up 338.8 per cent, and it is one of the top performers over 12 months.
Income investors may also find opportunities in the smaller trusts segment. The average dividend yield of the 20 funds we identified is 2 per cent, which is some way below the 3.2 per cent average for the whole universe of investment trusts, according to the AIC. Six of the trusts have yields above the average, including Acorn Income fund* at a 4 per cent yield, which blends a portfolio of smaller UK companies to make up around 75 per cent of assets, with an allocation to high-yielding securities, and two more UK equity funds, Chelverton Small Companies Dividend and Shires Income, both yielding above 4.5 per cent.
*Research client of Edison.
Sarah Godfrey is investment companies analyst at Edison