Investment trust tips: Upbeat

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

If the markets regain their energy, then the following selections from our panel should power ahead.

Don't forget, your own investment outlook is key to your decisions; if you don't hold out much hope for the state of the stockmarkets, then playing it safe is likely to be for you.

For for a less adventurous option read the first part of our look at investment trusts: Investment trust tips: Cautious

Globally diversified

Scottish Mortgage +23.3% (performance in year to 1 August 2011)

Edinburgh Worldwide, up 17%, was last year's aggressive global choice, but we are replacing it with its stablemate, Scottish Mortgage Trust. SMT also searches worldwide for companies with outstanding long-term potential and has been the better of the two in four of the past five years.

It has very low costs, it has raised its dividend by more than inflation for 29 years and it takes steps to control its discount.

Managed by James Anderson and his assistant Tom Slater, the high-conviction approach aims to identify major trends that will influence investment returns over the next decade or more. For example, Anderson considers Europe's sovereign debt problems to be inconsequential compared with "the comparatively predictable forces of technological change and the re-emergence of great nations".

A third of the portfolio is based in the US because it is home to innovative companies such as Amazon (AMZN), Salesforce (CRM), Rockspace and First Solar (FSLR). The next-largest holding is in China, thanks to rewarding stakes in Baidu and Tencent.

UK mainstream

Lowland +43.9%

James Henderson has reaffirmed his credentials as a smart money manager over the past year at Lowland Investment Company. The trust has fully recovered from its 2008 travails, and its 10-year record justifies its low discount to net asset value. It remains our aggressive choice.

Henderson is a value-oriented sharepicker who has done well from swinging the balance of the portfolio between large, medium and smaller companies. Each currently accounts for a third.

Much of the recent success has come from backing UK companies that are capitalising on growing demand in emerging markets. He sees no reason why this should be undermined by sovereign debt problems in Europe. As a result, he has 33% of the portfolio in industrial companies.

He says: "The internet has made overseas markets more accessible and sterling weakness has made UK companies more competitive, and they are winning back work from China, where manufacturers tend to be too inflexible."

He adds: "There is scepticism about the strength of the UK recovery, but in sectors such as aerospace, order books are full, and that filters through to a lot of companies." Gearing of 13% underlines his optimism.

Emerging markets

Templeton Emerging Markets +18.5%

Given the volatile mix of promise and danger confronting the leading emerging markets, we are making the large, liquid and low-cost Templeton Emerging Markets Investment Trust our aggressive choice.

The trust has a fantastic record and its long-standing manager, Mark Mobius, backed by Franklin Templeton's worldwide emerging markets team, has the experience needed to adjust the concentrated portfolio to suit changing circumstances.

Mobius warns that the growing use of derivatives could trigger another financial crisis. However, crises can create opportunities and he intends to use short-term setbacks to buy at attractive prices.

He expects his value-oriented portfolio of companies to ride out any storms and reminds investors that emerging markets are growing three times faster than developed markets. They also boast higher foreign currency reserves and lower debt-to-GDP ratios than developed markets.

UK smaller companies

Aberforth Smaller Cos +31.9%

Standard Life UK Smaller Companies has performed brilliantly for us, but we are replacing it because the premium rating leaves investors with too much downside risk.

Instead we are turning to Aberforth Smaller Companies, which performed very well for us in 2001 to 2003. It has had a rough ride over the past five years, because its value-oriented style has been out of tune with the market's growth orientation, but its stable and well resourced management team are hopeful the tide is turning in their favour.

The portfolio is diversified across 91 companies, around half of which are mid caps, and there is no exposure to AIM. Around 30% is in industrials and 23% in consumer services. The emphasis is on companies with good prospects, flexible balance sheets and ideally rising dividends - the trust likes to maintain and enhance its attractive yield. This is assisted by one of the lowest TERs in the sector.

On average the trust's holdings are on a much lower price/earnings ratio and higher yield than those of its benchmark, the Hoare Govett Smaller Companies Index. The managers are sufficiently confident to have gearing of 8%.

Asia Pacific excluding Japan

Henderson TR Pacific +17.2%

This trust remains our aggressive choice because it is boldly positioned, with 35% in China and 13% gearing. But Henderson TR Pacific Trust is not for the faint-hearted.

Manager Andrew Beal runs a concentrated portfolio of the best growth companies he can find. His high China weighting has done him no favours over the past few years, and he has cut back a bit, by reducing financial shares in particular. However, he remains strongly committed to China's growth areas, such as leisure, housing and healthcare.

Another theme is car manufacturers, and the trust has automotive holdings in Korea, India and China. "We see tremendous opportunities for further growth in auto sales as household incomes continue to rise across the region," he says.

The trust's base fee is admirably low. Its performance fee depends on three-year outperformance of its benchmark and is capped at 2.5%.


Baillie Gifford Shin Nippon +33.5%

This did well as our aggressive Japanese trust last year and retains its position.

Manager John MacDougall has managed Baillie Gifford Shin Nippon since April 2007. He has achieved great returns from a concentrated portfolio of very small companies that have grown impressively. "Smaller companies don't need a growing economy to grow sales, just a good idea that there is a demand for," he says.

MacDougall topped up his portfolio at bargain prices after the tsunami and has some of the highest gearing in the sector.

Holdings tend to fall into one of three categories: companies that benefit from rising overseas demand, such as Nabtesco, which supplies industrial joints used in high-speed rail equipment and industrial robots; firms creating new markets, such as apparel website operator Start Today; and companies pursuing a more efficient approach to business, such as Message, which operates competitively priced nursing homes.


Herald +40.0%

Herald Investment Trust, which was also last year's choice, has capitalised on the revival in the technology sector with two successive years of strong gains. It invests worldwide in companies involved with communications and multimedia but generally has around 60% in the UK on valuation grounds.

This differentiates it from the other two technology specialists, as does its smaller-company focus. Neither factor justifies its discount, which is much wider, despite offering superior returns over most periods. It is the only one of the three with no performance fee, and it has bought back more than 9% of its shares over four years.

Katie Potts has managed Herald since launch in 1994. She says smaller companies have greater growth potential because they are more likely to focus on new ideas. She offsets their lack of liquidity by diversifying across 240 or so holdings. However, the top 10 account for a quarter of the portfolio, which gives it a bit of punch.

Potts says earnings per share in the sector have risen more than share prices over the past five years, so valuations remain attractive. The big technology companies have plenty of cash to improve their range by buying tiddlers. The emergence of tablets and cloud computing have opened up massive possibilities.


Jupiter European Opportunities +21.3%

Alex Darwall's glacial approach to managing Jupiter European Opportunities Trust can result in occasional bad years, but it was effective last year and his 10-year results are outstanding. JEO remains our aggressive choice.

The recently-introduced performance fee can claim up to 7.5% of total assets, which is somewhat excessive. However, Darwall's multi-million pound personal stake in the trust's shares ensures his commitment and the discount looks wide given the long-term performance record.

Darwall focuses on finding 30 or so world-beating companies with differentiated products or services that he expects to hold for many years. Most are based in northern Europe and a third in the UK. "Our holdings tend to be dominant operators in niche areas. Their exposure to fast-growing economies around the world should continue to prove beneficial," he says.

Private equity

Pantheon International Participations +41.7%

Last year's aggressive choice, which we are retaining, is a well-diversified private equity fund of funds. It was very over-extended when the 2008 crisis hit, which has damaged recent returns, but it has brought its funding difficulties under control and is hopefully moving into a sweet spot.

One of its attractions is that it has a relatively mature portfolio, which should help it maintain the strong flow of realisations it has achieved over the last year. Realisations are when private equity trusts expect to make their best returns.

Another strength is that a third of its portfolio is in venture and growth investments, including a number of technology companies that have been attracting bids from larger, cash-rich peers.

Its geographical mix is also appealing. More than half of its holdings are in the US, where the climate for realisations is relatively good. Just over a third is in Europe including the UK, and the balance is in Asia, where long-standing manager Andrew Lebus has particular expertise.

Last year's strong share price gain was helped by a reduction in the discount on the ordinary shares to 30%. Given PIP's attractive spread of mature holdings, it still looks excessive.

Brokers' selections

Perpetual Income & Growth +20.9%

Simon Elliott heads the investment company research team at Winterflood Securites. He chose JPMorgan Overseas last year and is backing Perpetual Income & Growth Investment Trust for 2011/12.

He says: "Mark Barnett of Invesco Perpetual manages this trust using an active, unconstrained approach that seeks to achieve absolute returns with little regard to benchmark weightings.

"It currently yields 2.5%, and has one of the highest levels of dividend cover in the UK income growth sector, as well as revenue reserves equivalent to around a year of dividends.

"The trust's long-term record is strong, and recent returns have been assisted by the portfolio's cautious positioning. The negligible discount reflects its strong performance record and covered dividend."

Edinburgh Investment Trust +21.7%

Perpetual Income & Growth's sister trust, Edinburgh Investment Trust, managed by Neil Woodford, is being backed by Alan Brierley, who heads the investment companies research team at Collins Stewart.

"With growing evidence that the economic recovery is in danger of stalling, we would recommend investors adopt a nimble approach and be wary of less liquid investments," says Brierley.

"One of our favourite stocks is Edinburgh Investment Trust. The portfolio consists of high-quality defensive businesses that have sound balance sheets, resilient and transparent earnings, and the potential to deliver consistent dividend growth, even against a more challenging economic backdrop.

"The manager believes these investments are now profoundly undervalued and that the current portfolio offers a 'once in a decade opportunity'. The dividend yield is an attractive 4.5%."

Caledonia Investments +5.8%

Herald Investment Trust did well last year for Charles Cade, who leads the investment company team at Numis Securities. He is now backing Caledonia Investments, which has one of the widest discounts in the global growth sector.

Cade says it has a unique investment approach that involves taking significant minority stakes and acting as a long-term supportive investor, and this has helped it achieve strong long-term returns. However its defensive bias, and exposure to some unquoted and lacklustre holdings, have held back returns in the past two years.

"Will Wyatt completed a strategic review after being appointed chief executive in July last year. He plans to focus on fewer and larger investments that can have a big impact on performance. He has introduced a new income and growth equity portfolio to enhance the yield.

"Although the changes are subtle, we believe they have the potential to reinvigorate performance."

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