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Income Investors Look to Global Equities and Infrastructure

Developed market equities prove popular with closed-end fund investors - with infrastructure and biotech trusts making the top 10

Karen Kwok 31 October, 2016 | 10:36AM

Investors continue to favour developed market equities over emerging markets despite political uncertainty in the UK, US and across Europe. Last month, the top 10 most popular investment trusts with Morningstar.co.uk readers were found to mostly invest in the UK and the US – with 40% invested in UK stocks, 30% in US stocks, and 14% of stock holdings listed in Japan, the Morningstar portfolio X-ray tool reveals.

Despite the outcome of a Brexit vote, UK equities remain popular – in part because they have rallied so considerably since June 24.

Financial services stocks are the most widely held sector in the top 10 trusts’ portfolios, followed by healthcare and consumer defensive stocks. Financial stocks were hammered on the day of the Brexit vote as investors worried about the negative impact in a post-Brexit economy.

Financial sector investment trusts are trading at an average discount of 13%, data provided by Winterflood Securities and F&C Investments showed.

The unpopularity of financial stocks presents a buying opportunity, Richard Buxton, manager of the Old Mutual UK Alpha Fund recently told Morningstar.

The forthcoming US election is a cause for some concern among investors. The healthcare sector has already seen some underperformance as Presidential favourite Hillary Clinton has expressed plans to regulate the sector, said Jake Robbins, manager of the Premier Global Alpha Growth Fund.

Most Popular Investment Trust

The most popular investment trusts in September was a global equity trust, Gold Rated Scottish Mortgage (SMT). This trust has been on top of the list over the last three months.

The trust is trading at 1.9% premium. It has 48% invested in the US. The trust has gained 18.3% year to date and it has a three-year annualised return of 20.5%.

With ongoing charges of 0.45% in 2016, this fund is exceptionally competitive among its global large growth equity Morningstar Category peer for very active management, Morningstar analyst David Holder said.

“The nature of the portfolio is likely to encourage volatility at times, but we are reassured by the experience of the fund managers James Anderson and Tom Slater and the wider approach at Baillie Gifford,” said Holder.

The Rising Popularity of Infrastructure

The infrastructure sector is trading at the highest premium across all the investment trusts, data provided by Winterflood Securities and F&C Investments reveals.

Infrastructure investment trusts have seen their premiums increase by five percentage points year to date.  The popularity of the sector is due in part to the expectation in of infrastructure spending to be announced in the forthcoming Autumn Statement.

Infrastructure trust RIT Capital Partners (RCP) was one of the three new entrants to the top 10 list on Morningstar.co.uk in September. The trust is currently trading at 0.4% premium. It has gained 4.8% year to date and it has a three-year annualised return of 14%.

The other two new entrants are Silver Rated Bankers Trust (BNKR) and Silver Rated Biotech Growth (BIOG). The Bankers trust is a very solid choice for global large-cap exposure with a helpful quarterly yield, Holder said. The trust is currently trading at 7.9% discount.

Investors should note this fund has a pronounced bias to the UK, with 28.6% of UK holdings and 26.9% US holdings. The board’s commitment to maintain and grow the dividend is a strong one, and the fund has grown its dividend every year for the past 49 years, Holder added.

“We like the simple, transparent nature of the fee structure not least because it results in a very competitive ongoing charge of 0.52% in 2015,” said Holder.

“Investors can be assured they are receiving high-quality, active management here for a very competitive fee.”

The trust gains 7% year to date and it has delivered an average annual return of 15% for the past five years. The fund yields 2.3%.

Biotech Bounces Back

The Biotech Growth trust is trading at a 6.7% discount. It has lost 3.8% year to date however it has a 30.3% five-year annualised return and a 15.4% three-year annualised return.

Holder thinks investors looking for biotech exposure are in safe hands with Biotech Growth Trust. The trust seeks capital appreciation through investment in the worldwide biotechnology industry. 

“The strength of the proposition comes from the in-depth knowledge that the investment team brings to this fast-paced and specialist market,” Holder said.

“The process is another reason for our high conviction. It is thorough, bottom-up, and emphasises investments in companies with underappreciated products in the pipeline, high-quality management teams, and adequate financial resources.”

However investors should be aware that this specialist area carries with it a wide range of potential risks above and beyond just pure generic equity risk, Holder warned. The technologies involved are highly complex, and clinical successes are uncertain. 

Other investment trusts on the top 10 list in September are Gold Rated City of London (CTY), Gold Rated Finsbury Growth & Income (FGT), Gold Rated Murray International (MYI),  Gold Rated Baillie Gifford Japan (BGFD) and 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
Baillie Gifford Japan Ord815.02 GBP-0.49
Bankers Ord940.01 GBP-0.32
Biotech Growth Ord780.02 GBP-0.51
City of London Ord411.02 GBP-0.72
Finsbury Growth & Income Ord862.09 GBP-1.02
Murray International Ord1,206.00 GBP-0.17
Premier Global Alpha Growth C Acc222.19 GBP-0.85
RIT Capital Partners Ord2,150.00 GBP0.00
Scottish Mortgage Ord525.41 GBP0.75
Woodford Patient Capital Trust31.52 GBP2.85

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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