5 Top Performing Investment Trusts

It has been five years since the FTSE 100 bottomed out at 3,500 and interest rates were cut to a record low of 0.5%. Which investment trusts have thrived in the interim?

Jackie Beard, FCSI 10 March, 2014 | 1:28PM

Much has been written already about the fact that it’s been five years since the FTSE 100 bottomed out and interest rates were cut to just 0.5%. Since that time, we’ve seen significant strength in UK equity funds in particular. In this article we take a look at the top five performing UK equity investment trusts.

BlackRock Smaller Companies (BRSC)

5-year NAV annualised return: 37.3%

Discount contraction: 10.7%

This fund has a Morningstar Analyst rating of Gold. It boasts consistent management since 2002 in the hands of Mike Prentis—and that includes the transfer of its management from 3i to BlackRock in 2005. Prentis is part of a small but tight-knit team led by Richard Plackett, with whom he worked alongside at 3i: They are small-cap veterans with depth of knowledge and expertise and their process is based on the assessment of five criteria at every stock. While the Morningstar risk rating is High, shareholders have been well rewarded for the risk that’s been taken under Prentis’ tenure. He has navigated the fund’s gearing well through the European debt crisis, for example, and he has gradually reduced the exposure to AIM stocks on the belief there are better opportunities prevalent in less risky names. Further, shareholders have benefitted from a healthy tightening in the fund’s discount to NAV.

Henderson Smaller Companies (HSL)

5-year NAV annualised return: 37.3%

Discount contraction: 13.5%

Neil Hermon has managed this Bronze-rated fund since November 2002—another long tenure from a manager with solid experience in UK small-caps. Hermon tends to invest slightly higher up the cap scale than Prentis; some of this is a function of strong performance from his small-cap names that have become mid-caps. To that extent, he’s true to the benchmark index, which is nearly three-quarters in FTSE 250 names. The risk profile here is high and Hermon’s not afraid to have distinct sector biases, although there are risk controls in place to limit these. Hermon has a strong focus on quality which leads to his portfolio looking a little more expensive on an earnings basis, but with faster growth and that stance has been beneficial in the last five years in particular.

Strategic Equity Capital (SEC)

5-year NAV annualised return: 36.6%

Discount contraction: 34.5%

This fund is managed by GVO Investment Management and its investment process changed considerably in mid-2009 under new managers Adam Steiner and Stuart Widdowson. The managers take a private equity approach to investing in public companies, in an unconstrained portfolio. That means they engage directly with their investee companies to improve their strategy or operations, in much the same way as a private equity investor. To that extent, every holding has an entry and exit strategy with clear catalysts for value creation and the fund has posted positive gains every year since the introduction of this approach. The fund has also had the benefit of a strongly tightening discount as the private equity sector has performed well since the market turned in 2009.

Lowland (LWI)

5-year NAV annualised return: 35.8%

Discount contraction: 4.8%

Lowland has a Morningstar Analyst rating of Silver. The fund is now trading at a premium to its NAV and the board has issued additional shares in the last year to counter this demand. Managed by James Henderson since 1990, this fund boasts solid management from a stable team with whom he’s worked since the mid-1990s. He invests throughout the UK market, with no particular penchant for any market-cap segment, and it’s this approach that has enabled him to perform well at this fund in the last five years in particular. There is a small tail of AIM-listed stocks as he embraces the benefit of a fixed capital base. That said, it’s a higher risk fund than some peers, with double-digit gearing as the normal stance and liquidity constraints at the lower end of the portfolio, given the AIM exposure.

BlackRock Throgmorton Trust (THRG)

5-year NAV annualised return: 35.5%

Discount contraction: 9.0%

This fund is also run by Mike Prentis of BlackRock, but with the skills of Richard Plackett for an additional segment of the assets. Prentis runs the core portfolio comprising 100% of shareholders’ funds, while Plackett runs up to 30% in a contracts-for-difference portfolio, effectively adding up to 30% gearing to the fund. In this section, he will take long positions in existing holdings in the portfolio, or short positions on stocks or sectors on which the team are negative. He will also hold long CFDs on sectors. This fund holds our Silver rating. Plackett will be taking a six-month sabbatical from the firm from April and in his absence the CFD portfolio will be run by Ralph Cox, who co-manages the team’s UK hedge fund. Given the stability with the core portfolio through Prentis, though, our conviction remains.

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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.

About Author

Jackie Beard, FCSI

Jackie Beard, FCSI  is Director of Manager Research Services, Morningstar EMEA

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