Investors Embrace Property and Smaller Companies Trusts

Property and smaller companies close-ended funds captured investors' attention on Morningstar.co.uk in July following the EU referendum

Karen Kwok 12 August, 2016 | 2:55PM

Property trusts have been hit post Brexit, with the sector trading at a wide discount – but this isn’t stopping savvy investors looking for bargains. Morningstar data reveals that the F&C Commercial Property Trust (FCPT) is among the top 10 viewed closed-end funds in July on Morningstar.co.uk. This trust is currently trading at a 10.4% discount. Despite of its 5% loss in 2016 so far, the trust has gained positive returns in the past seven years. It has 9.3% five years annualised return.

UK commercial property has been a very popular area for investors seeking a reasonable level of income in the past few years due to the “rock bottom” government bond yields, David Holder, Morningstar investment research analyst said.

Investors’ interest in commercial property has cooled since the beginning of the year as the Brexit vote loomed and high returns of the past three years looked unsustainable. These fears were proved correct; Six open-ended property funds suspended trading temporarily due to liquidity issues triggered by Brexit uncertainty last month. Closed-end funds in the UK Property category also saw their values fall, from a premium of 3.5% on May 24 to a discount of 3.7% on July 22.

Holder said investors should expect these trusts underlying assets to be revalued in the near future, narrowing the discounts.

“In a world of low or negative interest rates the attractiveness of commercial property within a diversified portfolio looks set to continue,” Holder said.

Investors Eye Smaller Companies Trust

Smaller companies in the UK tend to be more domestically skewed to the UK economy, potentially more heavily impacted by Britain leaving the European Union than their larger counterparts.

Because of this, closed-end funds under the UK small-cap equity category are trading at a discount. But Morningstar readers are aware of the buying opportunity this may present. The Gold Rated BlackRock Smaller Companies Trust (BRSC) is on the most popular closed-end funds list among Morningstar.co.uk readers. The trust is currently trading at a 15.5% discount and it has 15.2% five years annualised returns.

Holder said this trust managed by the experienced Mike Prentis looks appealing for those investors willing to take a longer term view within the context of a diversified portfolio.

“The fund was not positioned for the Brexit referendum result with a large consumer cyclical weighting and so its NAV fell substantially after the referendum, but it has recovered subsequently. We hold Mike Prentis in high regard and the trust remains one of our highest conviction ideas in the sector,” Holder added.

High Yielding Trusts in a Low Interest Rate Environment

A number of equity investment trusts saw dividend yields decline thanks to a rise in many share prices post Brexit, according to Stifel the brokerage firm. But there remain 14 trusts investing in equities with a yield of 4% or higher and investors are closely watching them which trading at a discount at the moment.

The Gold Rated Murray International Trust (MYI) came second on the most popular closed-end fund hit list among Morningstar.co.uk readers and it yields at 4.4%. The trust is currently trading at a 4% discount. Holder said returns of this trust have been much weaker over the past three years but its long term performance is strong. He believes this is an excellent option for investors seeking long term capital growth and income from global equities.

The Gold Rated City of London Investment Trust (CTY) came forth on the most popular closed-end fund hit list and it yields at 4%. The trust is currently trading at a 1.3% premium. Holder said the yield discipline helped the fund weather the financial crisis better than many. The fund manager Job Curtis has been at the helm for 24 years, a length of tenure that’s rare to see. The trust has seen positive returns over the past eight years.

Another popular investment trust on the list is the Silver Rated BlackRock World Mining Trust (BRWM). The fund is trading at a 17.3% discount. The trust flagged dividend cuts in the current year, but it is expected to be in excess of 4% despite the cut, Stifel added. It currently yields at 4.6%.

Other top investment trusts also continuously appear on the most popular hit list among Morningstar.co.uk readers, including three Gold Rated trusts: Scottish Mortgage Investment Trust (SMT), Finsbury Growth & Income Trust (FGT) and Jupiter European Opportunities Trust (JEO); one Silver Rated Witan Investment Trust (WTAN) and not rated Woodford Patient Capital Trust (WPCT).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock Smaller Companies Ord1,312.00 GBX1.08
BlackRock World Mining Trust plc350.50 GBX0.14
BMO Commercial Property Trust110.00 GBX1.10
City of London Ord401.50 GBX1.26
Finsbury Growth & Income Ord923.00 GBX1.76
Jupiter European Opportunities Ord814.00 GBX2.13
Murray International Ord1,140.00 GBX1.60
Scottish Mortgage Ord519.50 GBX2.57
Witan Ord211.00 GBX1.20
Woodford Patient Capital Trust44.15 GBX1.73

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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