2015 Investment Trust Awards: Best Specialist Trusts

Best High Income Trust: European Assets

With a yield of 6% at end January, European Assets trust qualified for our best high income trust award as well as our best European trust award, and has won both.

Not only that, but it also receives gold in our medals for monthly money awards, in the best overseas smaller companies trust category.

Paid every four months, its yield is the highest in the Europe equity sector because the directors are committed to paying annualised dividends equal to 6% of the company's net asset value (NAV) at the end of the preceding year.

This resulted in an 8.5% rise in EA's proposed total dividend for 2015, to €0.7581 (56p).

The directors set their high distribution policy in 2001. They could do so because EA is Netherlands-based, so it was allowed to fund its dividends from a mix of capital and income.

UK-based trusts have been free to follow a similar policy for a few years, but so far most have been reluctant to do so.

The high distribution policy appeals to many, but those worried about UK income tax can elect to receive payment in scrip instead of cash. One danger of subsidising dividends from capital is that it will eat into a trust's future earning power.

However it has not been a strain for EA in recent years, because its NAV total returns have been impressive, exceeding its benchmark every year since 2009.

A more significant danger is that EA's dividend will fall following any setback in the trust's NAV per share, as demonstrated in 2009 when the dividend was reduced from €0.8535 to €0.3551.

In contrast, most equity-oriented income trusts attempt to maintain or even raise their dividends during market setbacks.

Highly commended: Real Estate Credit Investments

Real Estate Credit Investments is the first specialist in debt instruments to feature in our trust awards.

Its NAV total returns of 85.49% over the past three years were boosted by trading profits, but have been mainly driven by the interest on its portfolio of real estate debt investments. These fund a yield of 6.4%, paid quarterly.

The Guernsey-based fund invested mainly in real estate-backed bonds until 2011, when its managers decided they could earn a higher revenue from direct property-backed lending.

To this end a pipeline of commercial and residential mortgage-backed securities, mainly focused on the UK and Germany, has been sourced and attractively structured by RECI's management house Cheyne Capital Management.

Graham Emmett became RECI's lead manager in 2013 and has lifted its loan portfolio to around 70% of assets.

RECI's top 10 holdings account for over half its assets. They include a loan secured against German multi-occupancy properties, a mezzanine loan secured on a fully-let retail park in Essex, and a subordinated loan secured against retirement villages in London and the South East.

They also include two bonds, one secured on UK government-backed housing (rated B) and the other on commercial loans secured by properties in Germany (rated E). The weighted average loan-to-value ratio of the top 10 holdings is close to 67%.

Best Private Equity Trust: SVG Capital

At 588p, SVG Capital's NAV per share remains a long way below its 2007 peak of 944p, but it has recovered strongly from its 2009 nadir of 75p.

Recent progress has been relatively pedestrian, with only a 7.7% NAV total return in the 12 months to end January.

However, this followed five years of double-digit gains, and SVG's three-year NAV returns have been better than all its peers, so it secures this award.

The trust previously focused exclusively on private equity limited partnerships (LPs) managed by Permira.

However, in 2012 the board decided that SVG should be less dependent on one manager and take stakes in LPs managed by a range of leading management buyout specialists in Europe and the US.

Securing stakes in a diversified mix of LPs has taken time, as has the gradual realisation of the Permira funds that date back to 2006 or earlier.

But these have produced some handsome gains on holdings such as Hugo Boss and Freescale Semiconductors. Post-2012 investments now account for 24% of the investment portfolio.

It will take a few years for the newly acquired funds, managed by specialists including Cinven and US-based Clayton Dubilier & Rice, to become fully invested and even longer for them to start achieving attractive realisations.

However, their initial holdings are reportedly doing well, with average earnings and revenue growth of 12 and 10% respectively.

SVG Capital's share price almost doubled over three years. Along the way it has had several opportunities to tender tranches of its shares for sale on attractive terms, and it intends to keep returning capital to shareholders through NAV-enhancing share buybacks and tenders.

Highly commended: Harbourvest Global Private Equity

Anyone who invested in HarbourVest Global Private Equity Trust on the back of its success in our 2014 trust awards has been well served. NAV total returns of 18.1% over the last year were once again among the best in the private equity sector.

Share price returns of 35.7% were even better as the discount to NAV narrowed in anticipation of the shares joining London's main market. This is now scheduled for September and will be accompanied by changes to the trust's share structure and governance, including a move to a single class of shares.

The notice period for the manager, HarbourVest LC, is to be shortened from 24 to 12 months. However, shareholders seem unlikely to be looking for a change from this large and experienced US-based group, given the trust's consistently above-average returns.

The manager's statement that it sees the trust as "very much a flagship 'shop window' for HarbourVest's skills in private equity" indicates they are assured of continuing top-level attention.

Last year's returns were boosted by realisations at an average uplift of 40% over carrying value, indicating the conservative nature of the valuations within the ongoing portfolio. In sterling terms, they also benefited from the strengthening dollar. It is hard to tell how currency moves will play out this year.

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.