We run through the niche trust selections that look well placed to deliver the goods this year, and review how our 2019 selection fared.
Our niche selections should be seen as a complement to the predominantly equity-focused panel of conservative and adventurous selections, which we update every quarter.
Many have a low correlation with equity markets, and the majority offer usefully higher yields than most equity-oriented trusts.
A number focus on areas such as property, unquoted companies or infrastructure, which are so illiquid that they are far better suited to investment trusts than open-ended funds, as the Neil Woodford debacle has demonstrated.
Elsewhere, other niche selections are family-controlled trusts, which can be attractive core investments because their managers take a very long-term view and generally give a high priority to avoiding permanent loss of capital. In addition, we also consider venture capital trusts, primarily because of their special tax treatment.
One change from previous years is that we no longer include a direct lending/peer-to-peer trust because it has proved a treacherous sector, as demonstrated by last year’s choice of Hadrian’s Wall Secured Investments. Instead we have included a trust specialising in relatively high-yielding asset-backed securities.
Different investors have different priorities, and with this in mind we have divided our selections according to their objectives.
Long-term total returns
Caledonia Investments (CLDN) keeps its place because its chief executive of officer Will Wyatt has achieved net asset value (NAV) returns comfortably ahead of the FTSE All-Share index over his nine years at the helm, despite a cautious approach in recent years. Wyatt is a scion of the Cayzer family which owns over a third of the trust’s shares, and says his mission is to protect and generate value over the long term.
Caledonia has assets of over £2 billion, very low charges, a small but growing yield, and a well-diversified portfolio in terms of asset class, geography and sector. Wyatt believes equities are demandingly valued, so has pared back the trust’s globally diversified portfolio of listed entities to around 25% of the portfolio, and has also reduced its ‘income pool’ of higher-yielding UK equities. The balance is largely in private equity, either through funds specialising mainly in the US or Asia, or directly in unquoted mid-size UK companies. The latter sector accounts for over a third of the portfolio, focuses on “profitable businesses led by sound management teams with clear ambitions to grow” and targets returns of 14% per annum.
Prospects for UK equities have been usefully improved by the December election results. CLDN is liable to lag in rapidly rising markets, but should hold up relatively well in setbacks.
Micro cap companies
Launched in May 2018, Odyssean (OIT) has only a short record but a highly regarded management team, which is why it has won its place as a niche trust choice for 2020. Stuart Widdowson established a formidable reputation during eight years as lead manager of Strategic Equity Capital, and Ed Wielechowski was previously principal in the technology team at leading private equity manager HgCapital. The two have plenty of ‘skin in the game’, with a combined holding of 1.66 million shares in OIT.
The managers run a concentrated portfolio of 17 smaller UK companies which they deem to be good quality but trading at a discount to intrinsic value, and they seek to engage with their managers to enhance value. The technology, media and telecom sector accounts for a third of OIT’s portfolio, with 22% in business services and 18% industrials. The focus is on capital growth, and shareholders will be given an opportunity to exit at NAV less costs every seventh year.
Total returns with an attractive income
UK commercial property
Picton Property Income’s (PCTN) ‘occupier-focused, opportunity-led’ approach has served investors well during its three years as our mainstream UK commercial property selection.
Its management team, led by Michael Morris, is constantly engaged in refurbishing and upgrading its portfolio, and thanks to their efforts PCTN looks reasonably well-placed to ride out the challenges confronting the UK commercial property market. Nearly half the portfolio is in the relatively buoyant industrial market, mostly in the south east. A third is in offices, mostly in the south east but with recent purchases in Manchester, Glasgow and Bristol. Retail warehouses account for 8% and only 10% is in the troubled retail shops sector, including a large property in Covent Garden, London, which is being extensively overhauled, and high street shops in Bath, Bristol, Carlisle and Leeds.
Occupancy is down to 88%, but most of the void space is undergoing refurbishment with a view to attracting new tenants on rewarding terms once it is ready for re-leasing. Meanwhile, the trust’s borrowing has been prudently pruned back in recent years, leaving scope for opportunistic purchases in due course. The share’s move to a modest premium reflects the trust’s resilient returns. It keeps its place.
Supermarket Income Reit (SUPR) has gone from strength to strength since its 2017 launch, with net assets now exceeding £300 million. The Reit invests exclusively in large, modern, strategically positioned supermarkets which combine traditional shopping facilities with click and collect services and home delivery. Tenants must be institutional grade and are currently restricted to Sainsbury, Tesco and Morrison’s. The average lease length is 18 years, and all leases have RPI-linked rent reviews.
The managers aim to provide investors with stable, long-term, inflation-protected income and the potential for long-term capital growth through active asset management. The target dividend for the year to June 2020 is 5.8p, which has lifted the premium to NAV to 16.3%. This is not expensive relative to other investment trusts with long-term inflation-linked yields, though investors who wait for the next fundraising could secure a better entry price. The two founder managers each own over one million shares.
Direct/fund of funds private equity
ICG Enterprise Trust (ICGT) has continued to perform very creditably since its management team became part of ICG in 2016. The move has helped the managers source new co-investments, negotiate a new debt facility on attractive terms and increase the trust’s geographical diversification, with North American exposure up to nearly 30%. The UK is also around 30% and the balance mostly in Europe.
The overall objective is to invest alongside leading private equity managers in defensive growth companies. Over half ICGT’s assets are invested in a third-party funds portfolio, which has achieved five-year constant currency returns of 14% per annum. The balance is in a high-conviction portfolio of co-investments, which has achieved five-year constant currency returns of 19%, and it is planned to increase this section to nearer 60%.
The departure of Emma Osborne as ICGT’s lead manager due to her promotion within ICG is not a major blow, as the trust has a strong team, and she will remain on the investment committee.
Private equity direct
The sterling-denominated shares of NB Private Equity Partners (NBPE) replace those of HarbourVest Global Private Equity Trust for those who think the US economy and currency will remain buoyant.
Its US exposure is the highest in the private equity sector at 79%, and the discount on its shares is in the mid-teens despite competitive five-year NAV total returns and various efforts to improve their appeal. These have included a more attractive yield of 4.1%, funded partly from capital, and extensive share buybacks.
The trust is managed by Neuberger Berman, a US-based group with over $323 billion under management, of which a quarter is in private equity. Over the last five years its portfolio has been gradually rebalanced away from third party funds and income-oriented holdings to predominantly direct private investments alongside leading third-party managers.
The latter now account for over 85% of the portfolio, have lower fees than the trust’s former fund holdings, and are reported to be progressing well. Some should be approaching realisation, and can hopefully continue the trust’s record of achieving average uplifts of over 30% on valuations nine months before exit. This leaves NBPE looking well-placed to achieve further progress and a more attractive rating.
Income emphasis, but limited growth prospects
The UK election results were a great relief for the more UK-oriented infrastructure companies, lifting the threat of nationalisation and boosting hopes that significant new infrastructure projects will provide new opportunities.
We are sticking with International Public Partnerships (INPP), which has a well-diversified portfolio, with energy transmission, transport, education, gas distribution and waste water each accounting for between 22% and 10% of its portfolio. Around 72% is in the UK, and the rest in Europe, Australia and North America. The portfolio’s inflation linkage is the highest in its listed peer group at 86%, and the weighted average life of its concessions is the longest at 35 years.
Managers Amber Infrastructure have demonstrated their ability to source financially promising investments with positive ESG credentials, and last year restructured some of INPP’s debt so as to lower costs and improve financial flexibility. Dividends have been raised by an average 2.5% per annum since launch, with a similar rise targeted for 2020.
The Renewables Infrastructure Group (TRIG) has the best three-year NAV total returns in its peer group and an attractive yield paid quarterly. It remains our choice for the renewables sector where almost every established fund is on a substantial premium.
Its attractions include its diversified portfolio, with 73% in onshore wind, 13% offshore wind, 13% solar, and 1% in the nascent area of energy storage. In addition, UK exposure is 49%, with the balance in Germany, Sweden, France and Ireland.
Taken together, its sectoral and geographic diversification reduce its reliance on particular weather patterns, regulatory regimes and power markets. The dividend is paid quarterly and has grown by 2% per annum over the last five years.
TwentyFour Income (TFIF) invests in UK and European asset-backed securities, which are fundamentally robust but not liquid enough to be suitable for open-ended funds.
It targets NAV total returns of 6% to 9% per annum, much of it paid out in quarterly dividends. Most of its holdings are floating rate, so returns are expected to increase as interest rates rise.
It is managed by TwentyFour Asset Management, a fixed income boutique. Residential mortgage-backed securities account for over half the trust’s portfolio, and have historically suffered very low losses even in periods of economic stress. Over 40% of the portfolio is sterling denominated, and all overseas currency exposure is hedged into sterling.
Venture capital trusts
Venture capital trust (VCT) shares feature among our selections because a combination of factors enhance the income they offer to taxpayers. Firstly, yields tend to be high because most VCTs distribute a mix of income and capital gains, and secondly those distributions are tax-free regardless of whether the VCT shares were bought at issue or in the secondary market. To make the most of this we look for aVCT which offers an attractive yield.
We are sticking with Albion Venture Capital Trust (AAVC), which has paid out 2.5p a share every six months for the last decade. Changes in the VCT legislation mean its portfolio is gradually shifting towards younger growth and technology companies. However, the overwhelming majority is still invested in asset-backed companies in sectors such as healthcare and education, which will hopefully continue to support its dividend until its newer investments have time to mature.
AAVC’s shares generally trade in the secondary market at a discount of around 5%, giving a tax-free distribution yield of 5.6%. Alternatively, investors can claim up to 30% income tax relief on investments of at least £5,000 in newly issued shares bought through Albion’s current offer for sale. The tax-free yield on the net price is attractive. The 2019/20 offer for sales of new shares in the trust closed in mid-December, as it was fully subscribed.
Fund of hedge funds
Funds of hedge funds have the potential to capitalise on market turbulence. They are liable to underperform when equities and bonds are moving ahead strongly, but will hopefully prove their worth when risk assets are out of favour.
BH Macro (BHMG) invests all its assets in the Brevan Howard Master Fund, which targets consistent long-term appreciation though active leveraged trading on a global basis. Exposure is predominantly in global fixed income and FX markets employing a combination of global macro and relative value trading strategies.
BHMG’s sterling denominated shares achieved a 12.4% NAV return in 2018, when many equity funds were in the red, and a further 9% gain in the first half of 2019. The second half has been less rewarding, but the are still ahead over the year as a whole. Including them in a diversified portfolio should lower its risk/return profile.
Niche trust choices for 2020: key data
|Share price (p)||Discount/premium (%)||Yield (%)|
|BH Macro £ shares||2,610||0.7||0|
|International Public Partnerships||167||13.7||4.4|
|NB Private Equity Partners||1,210||-16.3||3.7|
|Picton Property Income||97||5.6**||3.6|
|Supermarket Income REIT||110||16.2||5.3|
|The Renewable Infrastructure Group||138||23.9||4.8|
Notes: *Tax-free, so worth more to higher-rate taxpayers. **Based on last reported quarterly NAV (end of September). Source: Figures sourced from Winterflood Securities and Numis, as at 1 January 2020.
How our 2019 niche investment trust choices fared
In 2018 most of our niche choices, along with the rest of the investment trust universe, suffered from widening discounts. As a result, share price returns were lower than net asset value (NAV) total returns. In 2019 it was the other way round, with most of our selections moving to tighter discounts. The result was some strong share price returns.
This was most marked in the private equity sector, where both ICG Enterprise and HarbourVest Global Private Equity’s sterling-quoted shares achieved above average NAV total returns, and saw their discounts virtually halved.
Our two property trusts also benefited from substantial re-ratings. We noted a year ago that Picton Property Income’s shares looked good value on an 8.3% discount, and so it has proved as they now trade on a modest premium.
Supermarket Income Reit joined our roster two years ago, largely due to its manager’s focus on producing an attractive inflation-linked income, plus the potential for capital gains. Steady growth in funds under management means it is now large enough to appeal to wealth managers, helping its shares climb to a premium in the mid-teens.
Elsewhere, the UK election outcome was a massive relief for the infrastructure sector, as it lifted the threat of widespread nationalisation. This led to The Renewables Infrastructure Group and the social infrastructure-oriented INPP gaining over 5% in the last month of the year alone.
Caledonia Investments’ performance looks dull by comparison, but its manager’s focus on preservation of capital means its NAV returns are liable to lag when markets are moving ahead strongly. They had, however, held up exceptionally well in 2018, and we hope they will prove similarly robust in future setbacks, providing some long-term ballast for investors’ portfolios.
BH Macro is also included for its potential to produce positive results in difficult times, as it too did in 2018 and in the first half of 2019.
Sadly, the same cannot be said for Hadrian’s Wall Secured Investments, which has been forced to make loss provisions against a couple of sizeable investments. This has severely undermined confidence in its management and its strategy, so the board has decided the trust should not continue in its present form.
It follows difficulties at other direct lending trusts, notably Ranger Direct Lending and Funding Circle SME Income, both of which are now in realisation mode. As a result we think the sub-sector is best avoided at this juncture.
Some strong share price returns in 2019
|Investment company||Share price
total return (%)
|BH Macro £ shares||9.3||7.4|
|Hadrian's Wall Secured Investments||-32.7||-10.9|
|HarbourVest Global Private Equity||33.1||13.4|
|Picton Property Income||18.3||5.0*|
|Supermarket Income REIT||21.2||7.2|
|The Renewable Infrastructure Group||28.6||12.0|
Note: one-year performance from tables supplied by Numis Securities, as at end 2019. *Estimated.