Hargreaves Lansdown has picked its top three investment trusts to back in the current climate.
The online investment broker has nominated the £7bn Scottish Mortgage investment trust, the £589m Personal Assets investment trust, and the £1.5bn Edinburgh investment trust as its favourites for investors.
Investment trusts, as 'closed-ended' investments, usually have a fixed number of shares in issue and so a fixed pool of money to invest.
"The closed-ended structure can be beneficial when investing in illiquid assets like property, because the fixed pool of capital means fund managers don’t have to hold large amounts of cash, or sell properties, to manage outflows," Laith Khalaf, senior analyst at Hargreaves Lansdown, said.
The Scottish Mortgage investment trust has performed well in recent years as a result of investments in the technology sector.
While a downturn in performance cannot be ruled out, the shares trade at a valuation that is cheaper than has been the case in recent years.
Adrian Lowcock, investment director at Axa, said the trust focuses on identifying companies with high growth and then looks to hold those investments for the very long term.
"The funds turnover therefore tends to be very low and the managers don’t pay any attention to benchmarks.
The trust has exposure to unlisted companies which is limited to 25 per cent of the portfolio.
"[It is fairly low cost at an around 0.44 per cent charge which given the focus on unquoted specialist business is good value for money," he added.
But he warned strong performance in recent years "hides the fact this fund is likely to be volatile as it tends to have exposure to disruptive companies and sectors such as technology, healthcare and consumer cyclicals".
On the Personal Assets investment trust, Mr Khalaf said it is suitable for investors with a cautious outlook.
“Managed by Troy’s Sebastian Lyon, the aim of this trust is to preserve and increase (in that order) capital over the long term.
"There are currently four main elements to the trust: the shares of larger companies, often with dominant market positions, selling products that millions buy regularly (including Unilever, Coca-Cola and Nestle); US and UK inflation-linked government bonds for inflation protection; gold bullion as a long-term store of wealth; and cash.
"This balanced approach is likely to look dull when stock markets are rising rapidly, but it comes into its own when they fall,” he said.
Mr Lowcock pointed out Mr Lyon avoids companies which destroy capital instead focusing on companies which are often unloved by the market, as he takes a longer term view.
"The trust tends to be less volatile than its peers as the manager avoids gearing and the trust looks to manage the discount/premium of the trust.
"It is likely to lag in bull markets as it has a large cash holding but the long term track record remains positive. Currently the trust has around 30 per cent in consumer defensives and 40 per cent in cash or cashlike investments."
The final trust nominated by Mr Khalaf is the Edinburgh investment trust, which is managed by Mark Barnett.
He said it is most suitable for investors who have income as a priority.
He said: “Managed by Mark Barnett of Invesco Perpetual, this trust is trading on a healthy discount, no doubt a function of the negative sentiment towards the UK.
"While this may persist for a while, it has thrown up some opportunities for contrarian investors, specifically companies reliant on the domestic economy and in out-of-favour sectors, such as healthcare and financials.
"This is where this trust has a lot of investments, including in companies such as AstraZeneca, Legal & General, and British American Tobacco. Just over half the trust is invested in larger UK businesses, and almost 30 per cent in the more domestically-focused FTSE 250 Index.
"The discount also helps boost the yield for income seekers.”
Mr Barnett has taken a markedly more positive view on the outlook for the UK economy than has the market as a whole. This has hindered the performance of the trust over the past year.
The Edinburgh Investment Trust has lost 8 per cent over the past year to 16 March, while the average trust in the AIC UK Equity Income sector in the same time period has gained 5 per cent.
Ian Lowes, managing director of Lowes Financial Management in Newcastle said he has been invested in Mr Barnett’s funds for years and praised his “strong track record.”
David.Thorpe@ft.com
