Advisers turn to emerging market investment funds

This is where investment trusts come to the fore, with an increasing number now opting to pay quarterly dividends to shareholders rather than the typical biannual or annual payments.

Mick Gilligan, head of research at Killick and Co, says income will continue to remain a strong favourite.

He notes the £548.8m Law Debenture Corporation managed by James Henderson as a good income provider, because it is high beta, with a bias towards industrial stocks and it is completely invested in equities with no gearing.

In its full-year results for the 12 months to December 31 2012, its net asset value (NAV) total return was 19.7 per cent, compared with a total return of 12.3 per cent for the FTSE All-Share index.

“Although the shares have had a strong run, we do not view them as overvalued – the current discount is towards the middle of the 12-month range,” he says. “This, and our medium-term optimism for equity markets, mean we stick with our buy recommendation.”

Mr Gilligan also suggests that emerging markets offer good value for investors at the moment, as well as providing income.

He recommends the £449.1m Utilico Emerging Markets trust managed by Charles Jillings and Duncan Saville at Ingot Capital Management, which has a portfolio made up of utilities and infrastructure stocks and a yield of 3-4 per cent.

“We continue to view this as an attractive portfolio that plays to our emerging market theme, with an attractive yield that we expect to grow over time,” he explains, adding that while the discount had narrowed from 10 per cent a year ago to 8 per cent now, it was towards the wider end of the recent range.

“We see scope for the shares to trade at a premium in time,” he says, stating that it held a buy rating.

Simon Elliott, investment trust analyst at Winterflood Securities, agrees that income and emerging markets will continue to be a strong holding in a portfolio.

In his view, the £302.3m JPMorgan Global Emerging Markets Income managed by Richard Titherington, is an attractive play for income, while offering exposure to emerging market equities. It currently offers a yield of 3.7 per cent.

“For investors looking for income and already heavily exposed to UK equity income funds, this trust provides diversification,” Mr Elliot says.

In the past 12 months, its NAV is up 17 per cent compared with 6 per cent for the MSCI Emerging Markets index.

Mr Elliot also favours private equity, which he admits is high risk but offers a higher reward with the right investment. His core recommendation is the £1.1bn Electra Private Equity trusts managed by Hugh Mumford.

Electra’s share price is up 39 per cent in the past 12 months and, as a result, its discount has tightened to roughly 10 per cent of its NAV.

Stephen Peters, investment trusts analyst at Charles Stanley, is also looking to Asia, and emerging and frontiers markets for income opportunities, as they are performing well.

In particular, he likes the £96m BlackRock Frontiers trust, managed by Sam Vecht, which has been performing well and this is expected to continue.

Aside from emerging markets, Mr Peters says a “value rally” in the past six months means it may be time to start looking at growth managers.

He singles out the £387.9m Jupiter European Opportunities fund managed by Alexander Darwall.

With the economic recovery in the UK expected to muddle through with low rates, analysts are looking further afield for their returns, with emerging markets once again taking centre stage as they had done in the aftermath of the crisis.

As ever, it is important for investors to pick a trust that suits their needs, but with emerging markets seeing growth of 5-8 per cent, compared to the anaemic progress of the West, it would seem time to revisit the emerging world.

Income seems set to dominate when it comes to picking the right fund and will be a feature for years to come as savers suffer. Private equity is also worth a look according to the analysts, but it is crucial to be aware of the risks before investing. Can you afford the high risk for the high return?

ADVISER PICKS

Graphite Enterprise trust

Francis Klonowski, financial planner at Klonowski and Co:

“It comes under the ‘private equity’ category, aiming to provide investors with long-term capital growth by investing in unquoted companies – either directly in such companies or indirectly through private equity funds. The management team has been together for 15 years. They have built a widely diversified portfolio across European private equity markets, with more than 300 underlying companies. Its performance is down slightly over five years, but averages 10 per cent a year in the past three years. It currently trades at a substantial discount to net asset value (NAV), which could make it a real bargain for investors.”

Real Estate Credit Investment

John Dance, investment manager at Vertem Asset Management:

“The trust predominantly invests in asset-backed securities such as European real estate bonds. While credit spreads have tightened at a sovereign level in Europe, many arguably more secure, commercial and residential mortgage-backed securities remain dislocated in terms of their valuations, returns and credit profiles, in many cases even versus high-yield bonds. In our view, policy action and investor appetite should see these spreads tighten and enhance NAV performance. Meanwhile, since the start of the year a 30 per cent discount to NAV has been almost fully unwound, so it is very much now about NAV performance.”