Winterflood eyes pick-up potential

In a review of its recommendations for the second half of this year, Winterflood investment trusts has added eight funds trading at significant discounts that it sees as ones to watch.

FS Beth Brearley 160 byline

Winterflood investment trusts has reviewed its recommendation list for the second half of 2013, replacing some top-performing big names with trusts deemed to be offering better value.

In the latest monthly report, Winterflood’s head of research Simon Elliott, says while recommendations are based on trusts’ individual merit, funds trading at a significant discount to net asset value that have the potential to see a pick up in performance are the ones to watch.

“If there is a theme, it is that there are value opportunities in the investment trust universe at present, particularly if you are prepared to take a contrarian view,” he says. “Selecting funds that have seen their discounts drift wider, following a period of indifferent performance or possibly when the mandate is out of favour, can lead to attractive returns. This is particularly true when performance picks up, the asset class starts to perform and the discount begins to tighten.”

So far this year, 21 of the 30 recommendations made by Winterflood have outperformed their benchmark.

“A reasonable result, particularly as the market has been a difficult one,” Elliott says. “Against this backdrop we have carefully reviewed our current recommendations and decided to make eight changes.”

The £2.7bn Scottish Mortgage and £591m Personal Assets trusts werereplaced in the global sector. The former’s manager, James Anderson, is taking a six-month sabbatical starting this month, while the latter has underwhelmed of late, Elliott says.

The trusts are being substituted with the £2bn RIT Capital Partners trust, “a more interesting prospect”, and the £1.5bn multi-manager trust Witan.

RIT Capital Partners is praised in the report for being a highly diversified fund with the attributes of a family office. Over 10 years its NAV is up 208 per cent versus the 137 per cent rise in the MSCI World index, but its “quieter” recent performance has led to a widening discount, which presents an opportunity, the report says.

Meanwhile the appeal of Witan lies in its move to more active management and a rise in performance – the fund is one of the best-performing global investment trusts this year. However it is still trading at a discount of 10 per cent, and Elliott says it is likely to be re-rated if performance continues.

The popular £371m Lowland trust – which has seen its shares move from a discount to a premium this year on the back of flying performance – was knocked off the list by Gervais Williams’ £138m Diverse Income trust. Despite trading at a 3 per cent premium, Elliott says the fund’s 3.6 per cent yield and small-cap bias make it a worthy holding in the UK Income Growth sector.

On the theme of small caps, Winterflood now backs the £326m Henderson Smaller Companies trust over the £264m Throgmorton trust.  Henderson Smaller Companies is currently trading on one of the widest discounts in the peer group at 18 per cent, belying its recent returns – the fund is currently the leading performer in NAV terms against its peer group over the past year.

With value plays scarce in the European sector and former recommendation, the £162m Henderson European Focus trust, having seen its discount shrink from 10 per cent to 4 per cent this year following solid performance, Winterflood picks out Dale Robertson’s £306m European Investment trust as the best of the bunch.

“At a current discount of 14 per cent, we believe the European Investment trust offers value, particularly given its yield of 2.7 per cent, including its special dividend,” Elliott says.

The £80m Henderson Diversified Income trust was replaced with the £132m City Merchants High Yield trust in the specialist sector, but with the caveat that the Henderson trust remains a sound choice for investors keen on floating rate loans.

Managed by fixed income gurus Paul Read and Paul Causer, City Merchants High Yield boasts good performance both over the long term and more recently.

The report notes Read’s recent comments that pockets of the credit market – such as financials – offer value while the trust’s discount has recently widened to 7 per cent, compared with an average of 3 per cent over the past year.

“We rate the managers highly, and for investors looking for exposure to credit markets we believe this represents an attractive entry point,” Elliott says.

In the technology sector, Winterflood replaced the £602m Herald trust with “a more mainstream play” in the form of the £121m RCM Technology trust, which saw its NAV rise 31 per cent against the 12 per cent rise in the Dow Jones Technology index over the past year.

“Despite the fund’s very strong performance….its discount remains wider than its closest peer [Polar Capital Technology] at around 11 per cent. The fund’s size means it is less liquid than its peers; however we believe that given the manager’s performance record and experience this fund is attractive for investors looking for specialist technology exposure.”

With the outlook for the property sector improving, Winterflood is swapping property trust giant F&C Commercial Property – which it deems “very expensive” at a 14 per cent premium – for the smaller-scale £161m Picton Property Income trust, which is trading at a 5 per cent discount despite a share price rise of 32 per cent year-to-date.

“At 12 per cent the fund’s void rate is relatively high, although with the internalisation of the fund’s management and its refinance having both now been completed the team are free to concentrate their efforts on improving occupancy. Consequently we see the vacancy rate as an opportunity.”