Money Observer's investment trust tips: Potent mix for bulls and bears

Our annual investment trust tips have had a tricky year. The market has not been hot enough to really suit our trust selections for bullish, adventurous investors, because these trusts tend to be growth-oriented and deploy above-average gearing.

This year's selections are split between UK-based, including private equity and specialist and global/regional-oriented sectors.

On the other hand, it has not been chilly enough to bring out the best in our more defensive conservative plays, which tend to be aligned with capital preservation strategies. Again, this year's selections are split between UK-based, including private equity and specialist and global/regional-oriented sectors.

Strong performers

In addition, sterling has been strong against the dollar, which has undermined the profits of UK-based companies with international businesses and reduced the net asset value of trusts with assets in the US or other dollar-denominated areas such as emerging markets.

Nevertheless, more than half our recommendations beat the FTSE All-Share index and the FTSE World ex UK index in the year to 1 August.

We like to retain our winners from previous years, so it is pleasing to note that a number of them have once again performed strongly in their sectors.

Notable achievers include Lowland Investment, Baillie Gifford Shin Nippon, Utilico Emerging Markets and Henderson European Focus.

Two of our three experts also had a good year, with Witan Investment Trust performing well for Simon Elliott of Winterflood Securities and BlackRock World Mining achieving similar double-digit returns for Alan Brierley at Canaccord Genuity. Click here to find out our experts' tips for this year.

As in previous years, we have picked two trusts for each of eight different sectors, plus two specialist selections.

The adventurous choices are for those who believe stock markets in the region concerned will offer opportunities for strong gains over the next 12 months.

These may suffer disproportionately if the market falls, but they have demonstrated their ability to recover strongly on the rebound.

Conservative

The conservative choices are for investors who want some market exposure but prefer a relatively conservative stance.

They may have a value orientation, hold a mix of asset classes, as at RIT Capital, or prefer the higher dividend yields associated with less adventurous choices.

We prefer trusts on wide discounts, as this enhances their yield and offers scope for accelerated share price gains if they outperform expectations.

However, well-run trusts on wide discounts have become rare, except in out-of-favour sectors such as smaller companies. We have therefore included a number of trusts on tight discounts or small premiums that are exceptionally well-managed.

The investment trust industry as a whole has been making good progress in bearing down on costs.

Trusts such as Scottish Mortgage Trust, Lowland Investment and Aberforth Smaller Companies have extremely low costs. Others are prodding their costs in the right direction.

JPMorgan European Income and Utilico Emerging Markets, for example, have scrapped their performance fees, while the board of Perpetual Income & Growth is negotiating for a better deal.