Just add spice
We asked trust experts to get adventurous…
The AIC asked analysts and wealth managers for their favoured higher risk sectors and trusts. These ideas are intended for investors who already have a core portfolio in place and are looking for higher risk investments.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “When building a diversified portfolio investors usually start with core holdings investing in mainstream global markets. If they have the appetite for risk, they may then consider small satellite holdings in higher risk and more adventurous sectors.
“When building a diversified portfolio investors usually start with core holdings investing in mainstream global markets. If they have the appetite for risk, they may then consider small satellite holdings in higher risk and more adventurous sectors.”
“Investment trusts can meet all these portfolio needs and are particularly suitable for accessing hard-to-sell assets like private companies, biotechnology or space technology. These trusts can add some punch to a portfolio over the long term but it’s worth remembering that the potential for higher returns comes with higher risk.”
Jason Hollands, Managing Director of Bestinvest by Evelyn Partners, said: “Areas that might deserve a satellite position to add some spice to a portfolio include emerging markets, smaller companies, private equity or infrastructure. These are all areas where the closed-ended structure of an investment trust has an advantage over an open-ended fund because the underlying assets are typically less liquid and, in the case of emerging market equities, can also be very volatile too. Accessing these areas through an investment trust structure means that when markets endure periods of turbulence and some investors panic sell, the managers of the trust won’t be forced to liquidate holdings to meet redemptions. Indeed, in such a scenario, they may be able to use borrowings to pick up holdings at depressed valuations.
“In the emerging market space, one of our key investment trust picks is Templeton Emerging Markets Investment Trust, which is very much the sector’s grandaddy having been launched in 1989. The trust is now managed by Chetan Seghal and Andrew Ness who leverage a research team that is embedded across local markets. It has a very pragmatic and patient philosophy, investing in companies with sustainable earnings that are mispriced.”
UK smaller companies
Gavin Trodd, Investment Companies Analyst at Deutsche Numis, said: “Odyssean Investment Trust runs a concentrated portfolio of 15 to 20 UK small and micro caps, taking a private equity style approach to public markets. The managers, Stuart Widdowson and Ed Wielechowski, look to take meaningful stakes in businesses that have fallen out of favour and are trading at discounts to their intrinsic value. They seek companies that can benefit from self-help opportunities and where the manager can generate value through engagement. Performance since launch has been exceptional, although investors need to be comfortable that performance may differ significantly from small cap indices over short periods, given the concentrated portfolio of 15 to 25 positions, reflected in a period of underperformance in 2023. However, we believe that the stock picking record speaks for itself and that Odyssean represents an attractive and differentiated addition to a portfolio.”
“Odyssean Investment Trust runs a concentrated portfolio of 15 to 20 UK small and micro caps, taking a private equity style approach to public markets. The managers, Stuart Widdowson and Ed Wielechowski, look to take meaningful stakes in businesses that have fallen out of favour and are trading at discounts to their intrinsic value.”
Jason Hollands, Managing Director of Bestinvest by Evelyn Partners, said: “In the UK smaller companies sector, we like the Henderson Smaller Companies trust managed by veteran Neil Hermon. The trust takes a ‘run with the winners’ approach of holding on to companies that may have started out in the small companies universe when first backed but evolve to become mid caps, so it’s more of a mid and small cap trust rather than a pure smaller companies strategy. Hermon and the team look for growth companies that can be bought at a reasonable price.”
Private equity and growth capital
Iain Scouller, Managing Director, Investment Funds Research at Stifel, said: “The private equity sector provides investors access to a much broader range of companies than those listed on stock exchanges, and many of these companies have delivered strong growth in recent years. Private equity trusts provide access to unlisted companies across many geographies including the UK, Europe and US, as well as exposure to a diverse range of industries including tech, retail and financials.
“The private equity sector provides investors access to a much broader range of companies than those listed on stock exchanges, and many of these companies have delivered strong growth in recent years.”
“Many of these trusts are trading on wide discounts to their net asset values typically of between 20% to 40%, which we think offers some value. We expect sales of companies from these portfolios to pick up over the next year and this should be good for investors – typically when an investment is sold, it is at a gain of 20% to 30% above its prior valuation, which results in an increase in the trust’s net asset value.
“There are a number of trusts which specialise in private company investments – for example HgCapital Trust focuses on software companies, whereas NB Private Equity focuses on companies primarily in the US and offers a dividend yield of about 5%. Finally, CT Private Equity has a portfolio across a diverse range of industries and its focus is on UK and European companies.”
Dan Boardman-Weston, Chief Executive of BRI Group, said: “There are a plethora of opportunities in the investment trust sector at the moment, with a number of trusts moving to large discounts to their net asset value. Sentiment and momentum has shifted in the past couple of months and share prices have moved higher, but discounts of around 50% still exist.
“There are a plethora of opportunities in the investment trust sector at the moment, with a number of trusts moving to large discounts to their net asset value. Sentiment and momentum has shifted in the past couple of months and share prices have moved higher, but discounts of around 50% still exist.”
“My preferred choices to liven up a portfolio would be Molten Ventures and Chrysalis Investments. Molten Ventures backs some of the most promising early and mid-stage companies, has a great long-term track record, yet still trades on a discount of at least 55% to its net asset value. This will start to creep narrower due to some successful revaluations, and its recent inclusion back in the FTSE 250 should help also. Double digit returns over the coming years seem highly plausible.
“I’d also consider Chrysalis, which has had a slightly chequered past, but seems to be behind most of its issues. A discount of about 38% is probably a little too cheap at the moment, but I think there is scope for a material uplift in net asset value over the coming years. These are a couple of trusts to tuck away and review in a few years’ time.”
Jason Hollands, Managing Director of Bestinvest by Evelyn Partners, said: “Private equity has become an increasingly important asset class but one that traditionally has been hard for retail investors to get access to. However, listed private equity investment trusts now provide that opportunity. A key pick here is HarbourVest Global Private Equity, which takes a fund of funds approach, allocating to a broad portfolio of underlying managers. A key distinguishing feature of HarbourVest Global Private Equity is a relatively high allocation to venture capital and growth equity funds, at 31%, which has the potential to drive strong returns.”
“A key distinguishing feature of HarbourVest Global Private Equity is a relatively high allocation to venture capital and growth equity funds, at 31%, which has the potential to drive strong returns.”
Biotechnology and healthcare
Gavin Trodd, Investment Companies Analyst at Deutsche Numis, said: “RTW Biotech Opportunities seeks to invest across the entire biotechnology lifecycle, both in terms of the cycle of clinical development and the stage of maturity. This includes company formation, crossover investments and listed businesses, as well as royalty financing to fund commercialisation. RTW Biotech Opportunities offers exposure to a sector that benefits from numerous tailwinds including increasing innovation and looming patent expiries which is likely to support further M&A activity.
“Since IPO in late 2019, RTW Biotech Opportunities has produced net asset value total returns of 87.6% (in US$ terms) compared to 17.7% for the Russell 2000 Biotech index and 41.2% for the Nasdaq Biotech index (to 30 September), fuelled by several companies delivering clinical successes and return generating liquidity events. RTW has made 65 private investments since IPO, of which 30 have experienced liquidity events – either an IPO or M&A (to 30 June 2024). The liquidity events have been at an average 2x gross multiple on capital invested, rising to 3x based on the 16 positions exited in full. The shares are currently trading on a discount of about 21%.”
Space technology
Shavar Halberstadt, Research Analyst at Winterflood Securities, said: “One investment trust that was certainly outside of the mainstream when we added it to our recommendations list in January is Seraphim Space Investment Trust. This spacetech focused strategy has since become the top performing investment trust over the year to date (62% share price total return), supported by operational progress, profitability and fundraising results at the portfolio company level.
“One investment trust that was certainly outside of the mainstream when we added it to our recommendations list in January is Seraphim Space Investment Trust. This spacetech focused strategy has since become the top performing investment trust over the year to date.”
“While year-to-date performance has reduced the discount from 68% to 51%, we believe that investors should continue to consider Seraphim Space as it is supported by structural tailwinds including rising defence spending and climate change monitoring. Recent substantial fundraising for some of its largest portfolio companies, backed by a range of established investors, shows validation by the private markets.
“Seraphim Space should gain from a falling interest rate environment which should benefit high-growth valuations and the IPO market. A range of contract wins from government agencies should mean sticky revenue, while the fund’s listed holding in AST SpaceMobile has returned 342% year to date, based on its partnerships with Verizon and AT&T.”
