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Five investment trusts for 2017

Richard Troue looks at a diverse selection of five investment trusts he believes could be worthy of consideration.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

As we move into 2017 our outlook for stock markets remains positive. In part this is because so many others are negative. With most investors in pessimistic mode, there is plenty of cash on the sidelines waiting for an opportunity to enter the market.

This means even though there are risks ahead - Donald Trump taking office in January, or Article 50 being triggered in the spring - any stock market dips could be heavily bought. We saw this with the Brexit referendum, where the market’s fall was quickly reversed although there are of course no guarantees.

Low interest rates add to the favourable backdrop for markets. In my view, high debt levels globally coupled with an ageing population will keep economic growth subdued and interest rates lower for longer than anyone expects.

Please note many investment trusts use gearing (borrowing to invest) and derivatives as part of their investment strategy. This adds risk. You should ensure you’re happy with the investment strategy and risks before investing. You can find all these details in the latest annual reports & accounts along with the charging structure.

Demand for income to continue

In this environment it’s easy to see the attraction of equity income trusts. They can offer attractive dividends, with yields in the region of 4%, and the potential for them to grow. Over the long term there is also the prospect of capital growth, although please remember any investment will fall as well as rise in value and income is not guaranteed.

The Perpetual Income & Growth Investment Trust, managed by Mark Barnett, currently yields 3.5% (yields are not a reliable indicator of future income). The trust is well-diversified, with exposure to larger and medium-sized companies in the UK, plus some companies listed overseas. There is an emphasis on companies with sustainable revenues, profits and cash-flows, which can ultimately help deliver dividend growth.

The trust currently trades on a discount to the value of its underlying holdings (net asset value, or NAV) of 8.6%. This compares with an average discount of 5% over the past year and 2% over the past three years. The current discount could therefore present an opportunity and we believe well-managed income-focused trusts could appeal to investors as other sources of income remain hard to find.

More on the Perpetual Income & Growth Investment Trust and how to invest

Growth potential from out-of-favour region

The economic backdrop in Europe has been poor for a number of years. The peripheral nations in particular are struggling with debt, unemployment and uncompetitive economies. It is important to disconnect economic prospects from stock market prospects though. Despite the poor economic outlook, Europe is home to many successful businesses with global earnings.

Alexander Darwall is one of our favourite managers for exposure to Europe. His open-ended Jupiter European Fund features on our Wealth 150 list. He also manages the Jupiter European Opportunities Trust, with a similar philosophy and approach. The main difference is the investment trust has more flexibility to invest in the UK, which currently accounts for around 30% of the portfolio.

Alexander Darwall believes economic data cannot be predicted with any accuracy. In his goal to perform better than the broad European stock market he focuses on factors within his control: finding the right companies with the right management that can harness long-term growth trends. He favours companies he believes create superior, differentiated products or services, with a market-leading advantage over competitors and the prospect of long-term growth.

The current discount to NAV of 5.7% compares favourably with the three-year average discount of 0.8%. Negative sentiment towards Europe has seen the trust perform poorly in share price terms over the past year, but Alexander Darwall is an experienced investor with an excellent track record and we believe he will serve long-term investors well.

More on the Jupiter European Opportunities Trust and how to invest

Going global

While the UK is home to many high-quality businesses, investors should also be mindful of opportunities overseas. This brings with it the added benefit of diversification across different countries and sectors, and exposure to different currencies. This reduces reliance on the UK and could help smooth out overall performance.

From this perspective Witan Investment Trust is interesting. Andrew Bell and his team use a multi-manager approach and aim to invest with a range of high-quality fund managers with differing areas of expertise from around the world. Approximately a quarter of the trust is invested in the US, 15% in Europe, 11% in the Far East, and 6% in Japan. Around 40% is invested in the UK.

We view Witan as a core global investment trust and expect it to deliver decent long-term returns for investors, although there are no guarantees. The shares are currently available on a discount to NAV of 5.8%, which compares with an average discount of 2.8% over the past three years.

More on the Witan Investment Trust and how to invest

Economic reform, done right

Among the more exotic and higher-risk areas for investment, we feel India offers tremendous potential. The country is in the midst of change. The country elected pro-business candidate Narendra Modi as its new prime minister in 2014, and the world cheered his plans for reform. His government aims to streamline India’s business environment and lift hundreds of millions out of poverty.

Indian companies are supported by a young and educated workforce, and an increasingly affluent population is spending more on consumer goods and services. The country is also taking its place as an IT and engineering powerhouse.

The JPMorgan Indian Investment Trust, has a bias to three main areas where the management team sees good long-term growth potential. This includes banks and financial companies, where they look for well-run companies able to take market share from state-run enterprises; materials and cement companies, which they expect to benefit from a pickup in investment over the next 12-18 months; and companies able to capitalise on rising consumer spending, such as the car manufacturers Maruti Suzuki and Tata Motors.

The current discount to NAV is 11.1%, compared with a three-year average of 12.0%. In our view, India has tremendous promise, although a long time horizon is essential for investing in this higher-risk region.

More on the JPMorgan Indian Investment Trust and how to invest

Bringing innovation to life

The Woodford Patient Capital Trust launched in 2015 with the aim to improve the UK’s poor track record of converting Britain’s academic success into commercial success. It can take a long time to develop and commercialise new products and there is a high degree of risk involved. Many investors don’t have the patient mind-set required and as a result these companies often struggle to obtain funding.

Neil Woodford, the trust’s manager, aims to change this by investing mostly in young, innovative businesses with the potential to disrupt entire industries. Around two-thirds of the trust is invested in the healthcare sector, with investments including Oxford Nanopore, a DNA analysis company spun out of Oxford University. The high proportion of investments in the healthcare sector and a relatively concentrated portfolio means the trust should be considered higher risk than a trust diversified across a greater number of sectors and companies.

It is a unique investment trust which offers the chance to invest in a range of early-stage and early-growth companies that wouldn’t ordinarily be available to the general public, although this is a higher risk approach. One of the main attractions is the genuinely patient approach, which gives investors the best chance of participating in the long-term success of some truly exciting smaller businesses.

More on the Woodford Patient Capital Trust and how to invest

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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