Investors warned off small-cap trust winners

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Investors warned off small-cap trust winners

Small-cap vehicles topped the investment trust performance charts this year but are notable by their absence from analysts’ 2016 recommendations.

The Association of Investment Companies (AIC) noted last week that UK, European and Japanese smaller companies sectors represented three of the top-five performing groupings in 2015. But analysts have suggested trusts lower down the cap scale could see more subdued performances next year.

An AIC survey of its memebers also found investment trust managers backed the small cap sector to lead outperformance in 2016.

However, Panmure investment fund analyst Charles Murphy said the strength of small- and mid-cap firms had surprised him this year, as had active managers’ resultant outperformance versus the FTSE All-Share index.

He said: “Generally when the environment is changing, the right thing to do is buy out of fashion assets and sell fashionable ones. You should be cautious about paying meaningful premiums for fund exposures and take profits in sectors that have rerated, such as UK small- and mid-caps and Japan.”

Mr Murphy said the speed with which property trusts had derated this year also took him by surprise, noting the F&C Commercial Property Trust moved from an 18 per cent premium to parity.

His recommendations for next year include commercial property, global income and UK renewables, with The Renewables Infrastructure Group and Henderson International Income Trust as two to monitor.

Killik & Co head of fund research Mick Gilligan said he expected large global stocks with “strong growth characteristics” to do well in 2016, naming the Scottish Mortgage Investment Trust and the Polar Capital Technology Trust as two favourites.

He added: “[Trusts in the AIC Global Growth sector] should benefit from superior revenue visibility in an uncertain world. We also expect continued dollar strength to be supportive”

Mr Gilligan also expected smaller resources-focused trusts – such as the New City Energy and City Natural Resources High Yield vehicles – to struggle as a result of several headwinds, including weak demand, reduced funding options and their lack of scale.

However, Mr Murphy said the potential for a surprise rally in oil or broader resources prices meant the likes of the BlackRock Commodities Income Investment Trust were worth keeping an eye on.

He also suggested owning the Fidelity China Special Situations, the Advance Frontier Markets and the JPMorgan Emerging Markets vehicles in the second half of 2016, should China pick up and boost emerging markets overall.