Crystal Balls – Investment trust picks for 2020 from Kepler

 

 

 

 

Last year the five-strong team at Kepler Trust Intelligence – including analysts and mere mortals – chose a trust each as our personal ‘top pick’ for 2019 and we will be reporting back on the performance of those trusts in early January, once the final numbers are in for this tumultuous year.

 

In the meantime I can reveal that an investment of £5,000 spread equally across our selections, made on 1st January 2019, would be worth £6,349 today and that performance puts us (slightly) ahead of an equivalent investment in a passive fund.

‘an investment of £5,000 spread equally across our selections, made on 1st January 2019, would be worth £6,349 today’

We will be using ETFs more frequently as comparitors in 2020 as we think they give a clearer indication of what investors could actually have made and in this instance, using the iShares MSCI World ETF as our comparitor, £5,000 invested there would be worth £6,280 today

And so, buoyed by that success and a surfeit of mince pies and Babycham, the team at KTI – our ranks now swelled to seven – are back with more predictions for 2020, like lucky first-timers, staggering drunk on glory to the next roulette table with a pocket full of chips, confident in our mastery of the great game.

For the benefit of those who take life too literally, it should be noted that this is a light-hearted article and these selections do not represent advice or any form of prediction. Don’t buy these trusts and then blame us if they don’t perform well – we aren’t telling you that they will and this isn’t ‘proper’ research.

 

Our picks for 2020

 

Tetragon Financial Group | Pascal Dowling

 

Tetragon invests in a diversified portfolio of alternative assets aiming to provide steady returns across various credit, equity, interest rate, inflation and real estate cycles and this stands in its favour in my view at a time when ‘The BoJo Effect’ and America’s continued ability to defy gravity have created significant complacency.

There are plenty of holes in the road ahead, and were we to hit one the sell-off would likely be severe for equities.

Perhaps more pertinent for the purposes of this column, the trust trades on a whopping discount of 47.7% despite being, in NAV total return terms, one of the best performing investment trusts in any sector, ranking sixth out of 347 trusts over ten years according to data from Morningstar.

Since inception in 2007 the trust has delivered annualised returns of 11.1%, and it currently offers a yield of 6%.

There are good reasons why the trust should trade on some sort of discount to NAV – the fact that shares in the trust do not come with voting rights means investors faith in the management, which owns the voting shares, must be implicit – but at such a wide discount, with such solid returns and a decent income to boot, surely there’s plenty of room for that to come in once investors cotton on.

 

Impax Environmental Markets | William Heathcoat Amory

 

Climate change and environmental considerations are more and more a factor on people’s investment radars. Impax have been plying their trade for over 20 years now, and have a depth of experience that can be matched by very few.

The small and mid-cap portfolio represents a selection of companies that should be able to grow earnings strongly, by exploiting their niches in helping to achieve a more sustainable global economy.

When the rest of the investing world catch on to these stocks, this should (hopefully) accelerate investment returns, when their earnings multiples expand. IEM doesn’t offer much of a discount opportunity (it trades on a small premium), but the board have a zero-discount target which should hopefully protect on the downside.

 

JPMorgan Russian | Thomas McMahon

 

The Russian market is extremely cheap, with the MSCI Russia index on a P/E of under 6.5 times as of the end of November. The country has gone through a deep recession following the oil price collapse in 2014 and the sanctions imposed by the US after the invasion of Ukraine, and remains out of favour with international investors.

However, it is undergoing significant corporate governance reform which has seen the dividends from its major companies skyrocket (the index is yielding over 5.5%).

Furthermore, the recovery in the oil price has helped the sovereign wealth fund generate a surplus which should be reinvested into infrastructure in the coming years.

With risk appetite in the global economy picking up, 2020 could be the year that investors turn to the areas that have been left behind in the recovery, such as Russia.

JPMorgan Russian Securities sits on a discount of 12% and the manager, Oleg Birulyov, has a good track record of identifying the most troubled sectors and companies and steering clear.

 

BlackRock World Mining | Callum Stokeld

 

2019 has, by no manner of means, been a disaster for the mining sector, and I believe it can continue to build on this in the new year. OECD leading indicators seem to be starting to turn in the direction of a recovery whilst global PMI data remains in expansion territory, and these seem likely to be supported by both fiscal and monetary policy support in most major economies.

This should be further helped if/when we start to see past US Dollar strength being annualised out. BRWM is well placed to benefit, with concentrated holdings in companies with some of the highest quality assets and lowest costs of production, in an industry trading at a substantial valuation discount to its own history and the wider market.

There is potential for discount narrowing in BRWM too, though I would not count on this as a driver of returns

 

William Sobczak | JPMorgan Smaller Companies

 

JMI offers access to fast-growing, innovative smaller companies domiciled in the UK. Although one of the top performing investment trusts (in price terms) over 2019, I believe there continues to be room to run. Irrespective of the metrics you use to look at the UK market, it is cheap.

UK smaller companies have been all but abandoned by international investors since the referendum, leaving strong companies that would demand premium ratings in the US, languishing. The announcement of a conservative government saw the discount narrow considerably and should we get a decent result from the Brexit negotiations, which I believe we will, I can see another ‘relief rally’.

This would likely move the trust from the current 3% discount to a premium, like many others in the UK Smaller Companies sector, while benefiting a huge number of the undervalued, underlying companies.

 

Oakley Capital Investments | Alice Rigby

 

Oakley Capital Investments is a focused private equity trust, run by an experienced private equity house, that was until recently trading on a mammoth 29% discount.

The discount on the trust still stands at 15% following the nicely profitable sale of one of its strongest-performing assets, WebPros, in December. But, while some of the trust’s upside is already gone, there are several reasons to believe it has a lot further to go.

The managers made several acquisitions in 2019, meaning there is long-term momentum behind the portfolio. At the same time, the trust has a long-term track record of delivering strong NAV growth.

Finally, the board has made significant efforts to make the trust more shareholder-friendly, including reinstating share buybacks, increasing disclosure around portfolio performance and introducing new marketing efforts, such as capital markets days, in a bid to diversify the shareholder register.

 

NB Private Equity | Henrietta Torrance

 

There is a concerted marketing push taking place and the portfolio is moving toward being 100% equity, so returns should reflect this.

The portfolio is largely 2016/2017/2018 investments, so should be moving into realisation territory. It is also has one of the highest dividends in sector and widest discounts – this should be attractive to investors.

 

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