Five niche investment trust tips for growth and income investors
26th February 2015 10:16
Our annual compendium of niche selections identifies opportunities in the closed-ended investment company and investment trust sectors, that are not on offer in the open-ended universe.
In some instances this is because the assets in which the trust invests are too illiquid to be sensibly suited to an open-ended fund, as is the case with our private equity choice below.
In others, it is because trusts use their capital structure to divide up the returns on a portfolio in order to offer an extra safe investment. In this selection we include a zero dividend preference (ZDP) share choice, and also a much higher yielding but more volatile trust of highly geared ordinary (HGO) shares.
Different selections are liable to show at their best in different market conditions, as evidenced from the accompanying table showing the results of last year's selections. ZDPs, for instance, should be far more secure than HGOs.
For most investors, it is sensible to hold a range of different asset classes, including some with an attractive yield and some which are more capital growth-oriented, some which are relatively immune to market movements and others which capitalise on the long-term income and growth that equities have historically achieved.
For the rest of our niche investment trusts tips for 2015, read: Six alternative and balanced niche investment trust tips.
As always it is important to think about your time horizons and how much you can afford to lose in riskier but potentially more rewarding vehicles.
Private equity - funds of funds
HarbourVest Global Private Equity
To complement the focus on direct private equity in the UK and Europe via , we are making our private equity fund of funds selection.
HVPE is managed by HarbourVest, which is a large and experienced US-based private equity firm. The trust invests mainly in HarbourVest managed funds, with two-thirds of its portfolio invested in the US.
An important part of its appeal is that it seeks to invest consistently in newly formed and sometimes secondary funds, regardless of the manager's top-down view of the outlook. As a result it is always close to fully invested and has a steady flow of holdings reaching the point where sales can be realised.
This has contributed to unusually steady growth in its net asset value (NAV) per share, while returns to sterling investors has been boosted by the recent strength in the US dollar.
The shares are traded in London and Amsterdam, are priced in dollars, and have no yield, as the trust is capital growth-oriented.
Subscription shares
Standard Life Equity Income
Subscription shares and warrants offer potentially exciting upside for a comparatively small outlay, but can expire worthless if the trust issuing them does not perform well within the warrant/subscription share's limited life.
The subscription shares of are this year's choice. They can be exercised every six months until 31 December 2016, and each entitles its holder to buy an ordinary share in the trust at 320p, as against the current price of 418p.
Standard Life Equity Income has done well in its peer group since Thomas Moore became manager in November 2011.
He looks for companies with strong dividend growth potential. "This continues to point us away from large companies and towards small and medium-sized companies that tend to have stronger balance sheets and many more years of growth ahead of them," he says.
Venture captial trusts
Northern Venture Trust
The main attraction of venture capital trusts (VCTs) is their yield. On mature generalist VCTs, this has averaged 7.1% over the last three years, and has the great attraction of being tax-free to investors via the secondary market, as well as to those who buy newly issued shares.
Unlike purchasers of newly issued shares, those buying VCT shares in the secondary market do not secure any initial tax relief. However, investors are released from the need to hold for at least five years to retain upfront relief. Buying resales also means they should be able to pick up shares at a discount.
Discounts to NAV have narrowed, because most VCT boards of directors have introduced discount controls. But if the discount control is set at 10%, for example, it allows investors to secure a slightly enhanced yield while providing reassurance about the terms on which they will be able to realise their holdings.
We like NVM Private Equity's VCTs because all three offerings have maintained their total annual distributions at or above a consistent target level over the past 10 years, their NAV total returns have all been above the sector average over that period and they are committed to keeping discounts in single figures. They are raising no new funds this year.
is this year's choice. Its average discount over the past year is the lowest of the three at 7.5%, but its minimum annual distribution target is the highest at 6p, which gives the shares a tax-free yield of 7.6%. Over the five years to 30 September, NVT paid out 37.5p in tax free dividends, and its NAV per share advanced from 80.3p to 87.8p.
Highly geared ordinary shares
Small Companies Dividend Trust
Highly geared ordinary shares are very vulnerable to a stock market setback, but have the potential to provide above-average total returns if markets continue to rise.
Given the current uncertain macroeconomic environment, we are steering clear of the more highly geared HGOs and opting for those of , which is only 31% geared, as even that level of gearing could provide plenty of excitement.
The trust specialises in genuinely small UK and Alternative Investment Market-quoted companies and only a fifth of assets are in companies capitalised at more than £500 million.
The trust's comparatively resilient performance over the past 12 months is encouraging and reflects its exposure to very small companies, which can do well regardless of what is happening in the wider economy.
David Horner has been lead manager since 1999. He is positive about the trading prospects of his holdings but wary about the market outlook.
"As a generalisation, UK small and mid-cap balance sheets remain strong, cash generation is robust and dividend growth remains above expectation. However, as investors are increasingly nervous with respect to the macro outlook, we expect that the price of UK small and mid-cap companies will remain volatile for the foreseeable future."
The yield of 4.5%, paid quarterly, is well-supported by revenue reserves, and will hopefully keep investors happy if they have to sit out a difficult period.
Zero dividend preference shares
Aberforth Geared Income Trust
The ordinary shares of have risen strongly since we selected them in the HGO category two years ago, but ran out of steam last year. We are therefore switching our attention to its zero dividend preference shares, which are due to be repaid at 159.6p in June 2017.
The trust's portfolio needs to shrink by a compound annual rate of 28.9% to threaten full repayment, which seems improbable. The gross redemption yield to repayment in full is 3.2%, which is tax-free if held in an Isa or if the gain is covered by the holder's annual capital gains tax exemption.
It is not exactly exciting, but for taxpayers it is better than the yield on cash. ZDPs with a higher gross redemption yield - such as Utilico Investment and 2020 (UTLE) - look riskier.
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.
Editor's Picks