Specialist investment trust tips for 2013

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.

Our annual examination of niche opportunities focuses on investments of a type not easily replicated outside of the closed-end investment companies sector.

Some are linked to equities so are likely to be at their best when stockmarkets are strong. Others invest in alternative sectors and should prove more resilient when stockmarkets are struggling. It is unlikely they will all perform well at the same time.

Looking at last year's tips, the ordinary income shares of JPMorgan Income and Capital:fs performed strongly, as was to be expected from a highly-geared share in a rising market. We are including a subscription share this year as an alternative way of gaining geared exposure to stockmarket strength, with the proviso that it could prove worthless if optimism fades.

Family trusts: Caledonia Investments

The attractions of family-dominated trusts include their long-term focus, and an emphasis on capital preservation. The uncertain outlook meant most were defensive in their asset allocation over the last year. Personal Assets Trust:fs and RIT Capital Partners:fs, for instance, recorded net asset value (NAV) per share total returns of less than 5%.

Caledonia Investments:fs performed a little better, but its share price returns were further impacted by an increase in its discount. At 25% it offers scope for accelerated share price gains if efforts to reshape the portfolio prove successful.

Will Wyatt is the most recent scion of the controlling Cayzer family to take charge. In his first two years he sold a lot of smaller holdings and increased exposure to the US and parts of the Far East. He has also boosted the trust's income by establishing an income and growth portfolio, and by favouring more mature investments in the unquoted sector, which accounts for more than a third of the trust's assets.

Caledonia raised its dividend by 15.6% last year, the 45th successive annual increase, and Wyatt is targeting further increases. Despite its rising income, the trust's main objective is long-term capital growth, which it hopes to achieve through an eclectic and proactive approach.

Listed assets include large stakes in Close Brothers, Bristow Group (offshore helicopters), Avanti Communications and a Belgian investment company. Unlisted assets include recently increased exposure to China and North America. Wyatt's personal shareholding in Caledonia is worth around £14 million.

Highly geared ordinary shares: Aberforth Geared Income Trust

The income and residual capital shares of split capital trusts should only be bought by investors who are bullish about each trust's portfolio, as their gearing means both NAV per share and income can be hard hit by market setbacks. On the other hand, most offer high yields and their NAVs per share can benefit disproportionately when things go well.

This year we are backing the highly-geared income shares of Aberforth Geared Income Trust:fs. The manager's value-oriented approach has worked well recently and we like the mix of 66% in FTSE 250 companies with most of the rest in UK smaller companies. As the trust is not due to wind up until mid-2017, it has time to make useful progress.

The income shares offer a running yield of 6.3%. Gearing is such that if the portfolio achieves average 5% annual growth in assets and income between now and wind-up in mid 2017 the income shares will enjoy a net redemption yield of over 11%. If assets and income fall by an average 2.5% per year, the net redemption yield will be minus 3.9%.

Investment trust warrants: Worldwide Healthcare Trust

Warrants and subscription shares offer the option to buy into the issuing trust's shares at a fixed price at set intervals in the future. They give investors the chance to gain rocket-propelled upside money if things go well, but can prove worthless if the underlying trust does not do as well as hoped before they expire.

We have picked the subscription shares of Worldwide Healthcare Trust:fs, which offer investors the chance to buy the underlying shares at 699p any day until 31 July 2014. They should outperform the shares if underlying share price growth exceeds 4% a year.

Worldwide Healthcare has been one of the top-performing trusts since its April 1995 launch. Sam Isaly of New York-based OrbiMed Capital has headed the management team from the start, and invests across the healthcare sector. Isaly argues that "Big Pharma" currently offers plenty of undervalued opportunities, and major biotech is entering a new growth cycle. Emerging biotech has been subject to rampant takeover activity.

Nearly 60% of the portfolio is in US companies with 20% in Europe, and the rest in Asia and emerging markets.

Read part two of our specialist investment trust tips, including our picks for venture capital trusts and zero-dividend preference shares, here. Part three, featuring infrastructure and timber trusts,is available here.