Interactive Investor

Four property trusts offering post-Brexit bargains

1st September 2016 14:23

Marina Gerner from interactive investor

Financial markets were initially rocked by June's Brexit vote, and investors must remain alert to various pitfalls and headwinds, even though markets, including the FTSE 100 index, are riding high.

However, now that investors have had time to digest the outcome, opportunities have emerged. In the wake of the Brexit vote, some of our panel of leading multi-managers believe the UK will remain a vibrant region offering opportunities at attractive valuations.

The weakness of property funds is seen as an opportunity to invest in property trusts whose discounts have widened to attractive levels.

Nevertheless, our panel stresses that, in these uncertain times, diversification remains paramount. In light of this, the panel has come up with some fund options that spread the bets far and wide.

David Coombs

Head of multi-asset investments at Rathbones

While many investors believe the UK is likely to dip into recession and that consumer spending will fall, David Coombs says this view is an overreaction and that some businesses look relatively cheap in the initial Brexit fallout.

He adds that monetary and fiscal stimulus is likely to tide the country over during its economic transition.

His team used the recent weakness to add to a "Brexit basket" of stocks, which included shares in ITV, Next, BT, Legal & General and housebuilder Persimmon. Coombs says these companies should continue to eke out growth, and share prices will recover from their post-Brexit vote declines.

Another avenue he used to take advantage of "Brexit bargains" was Mercantile Investment Trust. Run by JP Morgan, this small- and mid-cap investment trust has fallen to a 10% discount, which he argues makes it look good value for patient investors.

The trust's share price has fallen by 4% over the past six months (to end July), but it has been a solid performer over the long term.

Open-ended UK property funds have also endured a testing period in the months following the Brexit vote. Some funds moved to mark down the value of the buildings they own, while others went further and gated flows in a bid to prevent a run on assets.

Despite the abrupt volte face in sentiment, Coombs' team is happy to buy closed-ended real estate investment trusts that hold high-quality buildings in attractive locations.

The team added incrementally to its UK Commercial Property Trust, Schroder REIT and Land Securities holdings after their discounts widened considerably following the Brexit vote. These funds have low debt and invest in quality assets with long leases that should remain in demand, says Coombs.

A more defensively focused choice is Aspect Diversified Trends. This uses a quantitative strategy that identifies trends in global markets, and trades on those trends.

Historically, it has shown itself to be a great diversifying asset, according to Coombs. It has, for instance, made money off the slump in oil prices. The fund's objective is to achieve capital appreciation while closely controlling risk.

David Hambidge

Head of multi-asset investment at Premier

Like Coombs, David Hambidge sees opportunities in the UK. He has held Aberforth UK Small Companies in his multi-asset funds for more than two decades. Aberforth's management team focuses on picking up shares at cheap valuations.

Unusually, it only invests in UK smaller companies; it runs one open-ended fund and two investment trusts. The open-ended fund has a yield of around 3%. That's not high, but Hambidge thinks its dividend is likely to continue to grow.

European equities have also struggled this year as a result of the uncertainty surrounding the UK's relationship with the EU. Hambidge says valuations have become more compelling as a result.

While the Polar Capital European Income fund is relatively new, having launched in October 2014, Hambidge holds manager Nick Davis in high regard. The fund aims to deliver a yield of around 3.5%.

In spite of recent problems with several open-ended property funds, Hambidge is a fan of the real estate sector. He argues that the best way to get access is via a closed-ended fund, as the manager of such a fund won't be forced to sell assets as a result of redemptions.

He adds that investors can buy shares at attractive discounts to the value of the underlying portfolios as a result of the Brexit result.

One trust he holds is Picton Property Income, which he says is well diversified by region, sector and tenant. It yields just under 5%.

Peter Hewitt

Director and investment manager at F&C

In the wake of the Brexit decision, Peter Hewitt favours funds in the Investment Association's global equity income (GEI) sector. Managers there have the freedom to shop anywhere for dividend-friendly shares.

This is a key advantage, given the gloomier times predicted for the UK dividend market, with some experts pointing out that many firms are over-distributing - using too much of their profits to satisfy income-hungry investors.

Two GEI trusts Hewitt invests in and considers well positioned are Henderson International Income and Murray International. The Henderson trust does not invest in the UK and has around one third exposure each to the US, Europe and Asia Pacific.

Murray is positioned differently in that it has less than 40% invested in the US, the UK and Europe, and a greater exposure to Asia Pacific and emerging markets. It holds some bonds, to help boost income. Hewitt adds that both trusts are major beneficiaries of a weaker sterling.

Another area that has attractions in uncertain times, according to Hewitt, is infrastructure, because of its lack of sensitivity to equity markets and its predictable income.

Should the UK economy show signs of cooling next year or, worse, move into recession, the attributes of trusts invested in the infrastructure sector will come to the fore.

3i Infrastructure, one of F&C Managed Portfolio Trust's holdings, has stakes in companies such as Anglian Water in the UK and Elenia, a large electricity distribution company in Finland.

The assets of the trust generate strong and predictable long-term cash flows, which underpin a progressive dividend policy.

Peter Walls

Fund manager at Unicorn Mastertrust

Peter Walls sees the de-rating of TR Property as a good entry point for long-term investors. The fund's share price suffered in the wake of the Brexit vote, amid fear about inflated property valuations, particularly in central London.

Given that 60% of TR Property's assets are in continental European property markets, which Walls notes look undervalued compared with those in the UK, this de-rating looks harsh and therefore provides an opportunity for investors.

The post-referendum fall in the pound seems to have been largely ignored in the valuation of listed private equity trusts with significant overseas investments, says Walls.

The net asset value of Harbourvest Global Private Equity, for example, which has around half of its assets overseas, has been enhanced, but the share price has yet to respond, leaving the shares trading at a discount of 30%.

Given that interest rates won't be going up anytime soon, the outlook for financials remains clouded, according to Walls. Since the launch of Polar Capital Global Financials Trust in July 2013, the FTSE All-Share index has outperformed the FTSE Financials index by 18%.

But despite this headwind, the trust's net asset value growth is actually ahead of the FTSE All-Share. Walls predicts that the current double-digit discount will narrow ahead of the trust's wind-up, due in May 2020.

Walls says any improvement in sentiment towards financials could prove to be a good buying opportunity.

Ayesha Akbar

Portfolio manager at Fidelity Solutions

Investors need to continue to be cautious in their positioning in the current environment, says Ayesha Akbar. She points out that while the S&P 500 has reached new highs this year, government bond yields have reached new lows.

This appears to be a contradictory signal: higher equity prices are signalling a positive outlook on growth, but the demand for safe haven assets (even at negative yields) implies concern about the future.

However, some observers see this situation as entirely logical, says Akbar, because yield-starved investors have bid up areas of the market that offer attractive income.

As a core defensive position, Akbar favours the Henderson UK Absolute Return fund, an equity fund run by the experienced Benjamin Wallace, who has an attractive risk-adjusted record.

While the fund's short exposure means it will lag in equity bull markets, it should outperform in bear markets.

For those seeking a safe haven fund at a time of market volatility, Akbar mentions the Investec Global Gold fund.

The fund's investment team takes into account both the fundamentals of each precious metal commodity and the individual prospects of the stocks themselves, as well as top-down macro views and technical analysis. Akbar considers this a strong investment process.

Strategic bond or multi-asset funds can offer investors "instant" diversification, as they invest across a range of asset classes.

Akbar favours the Jupiter Strategic Bond fund, which has a strong focus on downside risk. Manager Ariel Bezalel has nearly 20 years' industry experience. He can invest in preference shares in addition to bonds.

*Note: Multi-managers may have a position in the funds they recommend.

This article was originally published by our sister magazine Money Observer here

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.