Adventurous investment trust tips: UK, private equity and specialist

A lack of market volatility and a weak dollar hindered our 2013/2014 tips, chosen to do well in either bearish or bullish markets. Nevertheless, we are sticking with our formula and many of the trusts that have rewarded investors in previous years.

As in previous years, we have picked two trusts for each of eight different sectors, plus two specialist selections. The adventurous choices are for those who believe stock markets in the region concerned will offer opportunities for strong gains over the next 12 months, but the conservative choices are for investors who want some market exposure but prefer a relatively conservative stance.

You can also view our global-focused adventurous trust tips, while our conservative choices in both UK-based and global-oriented sectors are here. We also have tips from a number of experts.

Below, Fiona Hamilton profiles a number of our UK-based, private equity and specialist adventurous trust selections for the year ahead.

UK mainstream

Lowland Investments (LWI) has suffered occasional jarring setbacks since James Henderson took charge in 1990, but it has always bounced back strongly, and its five- and 10-year returns are impressive. It remains our adventurous choice.

The trust's portfolio is unusual for a UK equity income trust: its 'neutral' position has a third each in large, medium and smaller UK-quoted companies.

Henderson says this allows him to achieve exposure to the widest possible diversity of corporate activity, which helps achieve consistent returns. He varies the balance according to where he finds the greatest value.

'The larger companies are ballast,' he says. 'The smaller companies offer the largest long-term gains, but are riskier, which is why I like a long list of holdings. When something goes wrong, it is not a huge blow.'

Lowland's highest weightings are in industrials and selected financials. Henderson believes companies in these sectors can build world-class businesses and control their own destiny.

He says most banks and utilities are vulnerable to regulatory interference, so he avoids these sectors. However, he has some exposure to oil and gas as a hedge against a hike in oil prices, which would damage his industrial holdings.

Gearing has enhanced Lowland's long-term returns. However, Henderson says he will reduce it if the average price/earnings ratio on the FTSE All-Share index exceeds 16, which he would deem expensive.

UK smaller companies

Henderson Smaller Companies Trust (HSL) manager Neil Hermon warns that his willingness to pay for companies with above-average growth works best in rising markets. So too does his tendency to keep gearing in high single figures.

Nevertheless, the trust has achieved above-average returns in all but two years since Herman took charge in 2002. The consistency of HSL's results coupled with its very low basic management fee and above-average discount to net asset value have led us to retain HSL as our adventurous choice, despite a disappointing run in the year to date.

Hermon's high exposure to companies in the FTSE 250 index was a disadvantage over the past 12 months, when more lowly valued smaller companies were playing catch up. He expects it to be less so now that small, medium and large company indices are on broadly similar forward price/earnings ratios.

He is frustrated that a number of his holdings have suffered from earnings downgrades due to dollar weakness, but he hopes this will be reversed by a stronger greenback.

Hermon adds that bid activity in large companies has drawn money away from mid caps, but he hopes increased merger activity down the size scale will help reverse the flow.

Private equity

Pantheon International Participations (PINR) is a large fund of private equity funds. Its portfolio is diversified: around 60 per cent is invested in buyouts and nearly 30 per cent in venture and growth capital.

More than 90 per cent is invested in funds that are at least six years old, which has resulted in a healthy flow of realisations. More than half the portfolio is invested in the US and 13 per cent in Asia.

As a result, dollar weakness against sterling offset most of the 11.9 per cent gain in the underlying portfolio in the year to the end of June.

Helped by a steep reduction in the discount, the ordinary shares have gained 134 per cent since joining our selection four years ago (then at 497p).

The redeemable shares, which have exactly the same net asset value but no voting rights, have done less well recently because their discount has not fallen as sharply - although they have sometimes been more highly rated.

The company can redeem them at 60 days' notice but must do so at par, which would entail a handsome uplift. Given the wider discount on the redeemable shares, they are this year's choice.

Specialists

Allianz Technology Trust (RTT) is our adventurous choice for the year, because we think the information technology revolution is still in an early phase, valuations are more attractive following the recent sell off and the Allianz trust seems well placed to capitalise on the most exciting opportunities.

Walter Price, manager since May 2007, is based in the heart of Silicon Valley within two hours flight time of many of the world's most exciting technology companies.

He and co-manager Huachen Chen are supported by two portfolio analysts, Allianz Global Investors' global technology analysts, and its 'grassroots' team, which provides insights into the products and services in demand.

Most of the trust's portfolio is in high-growth holdings focused on sectors such as cloud computing, mobile internet and internet security. Tesla Motors is among the top 10 holdings. The balance is in more-established companies trading on lower valuations, such as Apple and Microsoft.

More than 80 per cent of the portfolio is in US companies, whose value would be enhanced by dollar appreciation. Gearing is generally negligible.

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