Our annual tips offer a conservative and an adventurous selection for seven popular categories of equity-oriented investment trusts, as well as private equity and specialist trusts. We do not include any alternative asset categories as these are covered separately in our annual niche investment trust tips in February.
The conservative choices are expected to hold up better in difficult markets, often because their managers have been adopting a cautious approach, as is notably the case with Capital Gearing Trust and Temple Bar. They may also have little or no gearing, or pay an attractive yield compared with other trusts in their sector.
The adventurous choices are expected to perform better if stock markets forge ahead. Some focus on smaller companies, which can be hit hard in falling markets, but such trusts also boast significantly better long-term returns. Others emphasise total returns and therefore do not have a specific dividend policy.
We would expect the conservative and adventurous selections to do well at different times, and leave it to investors to decide whether to back the bearish or bullish options. The performance of our selections is monitored in a portfolio format, with updates and potential switches detailed each quarter.
This year marks the third anniversary of these portfolios and performance has been exceptional. The Conservative choices have gained 45 per cent and the adventurous tips are up a stunning 63 per cent. That compares very favourably with the 24 per cent return from the FTSE All-Share and 58 per cent gain from the FTSE World ex-UK index.
We like to hold on to our winners, so Baillie Gifford Shin Nippon and Henderson European Focus trusts keep their places despite their demanding ratings – both are trading on small premiums to net asset value (NAV).
However, given a choice between two well-managed trusts, we will opt for the one with the wider discount, as with our preference for BlackRock Throgmorton Trust and Pantheon International’s redeemable shares.
We also prefer trusts with competitive charges within their sectors and, in this context, welcome the recent trimming of charges at Templeton Emerging Markets, Schroder Asia Pacific, Standard Life Private Equity and Baillie Gifford Shin Nippon.
We like trusts that achieve consistently above-average NAV total returns, so it is no coincidence that seven of our selections featured in Money Observer’s 2017 Investment Trust awards last May, which are based on exactly that. However, if a manager has a good long-term record we are prepared to ride out the dips, as proved very rewarding last year with Allianz Technology Trust.
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