Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment trusts to buy for the year ahead.
19 Jan 2021
Last year was another excellent one for investment trusts. JPMorgan notes that 2020 saw the largest-ever outperformance of the FTSE All-Share by investment companies. And this century the FTSE Equity Investment Instruments index has generated a total return of 300.2% versus 131.7% from the FTSE All-Share.
This is a reminder that exchange-traded funds and unit trusts have their place. But if you are looking for real active fund management and the opportunity to invest in more specialised strategies, there is still nothing better than listed closed-end funds.
Are there any bargains left?
So which ones look promising now? There are few raging bargains out there. I would suggest some property trusts. The first is Phoenix Spree Deutschland (LSE: PSDL), a specialist investor in Berlin residential property trading at a 30% discount to net asset value (NAV). The shares have underperformed owing to concerns about new rent controls by the local government and there has even been talk of expropriating increasingly expensive flats. But my sense is that 2021 could see a resolution of some of these challenges and the discount could narrow as the fund continues to refurbish its flats and sell them off.
The PRS REIT (LSE: PRSR) has had a difficult 2020 as many of its property developments aimed at the rental market have been delayed. It trades at a near 20% discount to NAV and yields just over 5%. Its rollout programme seems to be back on track and sentiment might well improve for this laggard.
On a slightly more tentative basis, I would also watch the student-accommodation subsector. I expect a much more vibrant market by the autumn, and on that basis both GCP Student Living (LSE: DIGS), on a 16.8% discount and currently yielding 3.4%, and Empiric Student Property (LSE: ESP), on a yawning 32% discount, are worth putting on your radar. Consider also Stenprop (LSE: STP), which focuses on specialist industrial properties. Unlike its peers in this field it still trades at a small discount.
The best emerging markets
Look overseas in 2021 too. Consider the Fundsmith Emerging Equities Trust (LSE: FEET) and the Mobius Investment Trust (LSE: MMIT). Both are trading at discounts and are not overly focused on the Greater China trading block, unlike many funds in this area. I also think India, in particular, will rally in the second half. Focus on the Ashoka India Equity Investment Trust (LSE: AIE) and the cheaper, more mid cap-focused India Capital Growth Fund (LSE: IGC).
Moving over to Southeast Asia, many of the specialist Vietnamese funds are worthy of attention. Vietnam has had a good pandemic and outfits such as the Vietnam Holdings Fund (LSE: VNH) and the VinaCapital Vietnam Opportunity Fund (LSE: VOF) are ideally positioned to benefit from a surging domestic market as well as a general rebound across Southeast Asia.
Investors cannot ignore China. My favoured route in is with the Fidelity China Special Situations fund (LSE: FCSS).
Sticking with competing geographies and markets, a new trend is US green growth, courtesy of the Biden administration’s focus on climate change. There are already two specialist funds in this sector: US Solar Fund (LSE: USF) and the recently listed Ecofin US Renewables Infrastructure Trust (LSE: RNEW). A few existing infrastructure funds are also investing heavily in the US, with the SDCL Energy Efficiency Income Trust (LSE: SEIT) in particular worth watching. This energy-efficiency and storage sector is growing fast. Expect more share placings from SEIT, Gore Street Energy Storage Fund (LSE: GSF) and Gresham House Energy Storage (LSE: GRID). As the US ramps up its wind turbines and solar panels, it will need to improve energy efficiency and spend a lot on batteries to store all the extra intermittent renewable power.
Where to find income
Interest rates look likely to remain at rock-bottom levels for the foreseeable future, forcing investors to embrace alternative sources of income. Consider investors in non-bank credit such as Honeycomb Investment Trust (LSE: HONY) and VPC Speciality Lending Investments (LSE: VSL). The former yields over 8%, the latter closer to 10%. Both funds have been very proactive in managing their risk profile and should benefit from the economic rebound later this year.
Sticking with the income theme, more adventurous investors should research Biopharma Credit Investments (LSE: BPCR), which lends to the pharmaceutical sector. It has an excellent record and a 7% yield. The shares trade around par.
An overlooked gem
A fund most investors have probably overlooked is the Schiehallion Fund (LSE: MNTN). This private-equity fund trades on the specialist-funds market but can be bought through retail brokers. It is managed by the Baillie Gifford team and was launched with very little fanfare in March 2019, raising $477m (£361m) from a small group of institutional shareholders who are not typical holders of UK trusts, notably big pension funds such as the State Board of Administration of Florida.
According to analysts at Numis, the focus is on “companies with transformational growth potential that have scalable business models, with robust competitive advantages and a strong management team”. It already trades at a decent premium, but investments include Stripe, a payment processing and software outfit, mobile-games publisher Scopely and rocket maker SpaceX.
Finally, look out for a flotation of Graphcore, the multibillion-pound British unicorn building intelligence- processing units for specialist artificial intelligence analyses.
This could be a huge success and if it does capture investors’ enthusiasm, then the likes of venture-capital fund Draper Esprit (LSE: GROW), Chrysalis Investments (LSE: CHRY) and the Schroder British Opportunities Trust (LSE: SBO) will benefit hugely as they have invested heavily in this Bristol-based business.
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