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Numis: our 31 investment trust recommendations for 2018

Numis: our 31 investment trust recommendations for 2018

Last year was a great one for global stock markets and with valuations not yet reaching the 'bubble' valuations seen in 2000, Numis Securities is sticking with virtually all the equity investment trust recommendations it made a year ago (see table below).

However, Charles Cade, head of  Numis' investment company research team, is not suggesting investors sit on their hands completely.

'Without major political or economic shocks, 2018 could end up being very similar to 2017. Indeed, the year has started strongly, but with equity markets at all-time highs, we believe that investors should maintain a diversified portfolio and be willing to take some profits from funds that have rallied strongly over the past year, particularly if they are now trading significantly out of line with their historic discount range.'   

Numis divides its 31 'buy' recommendations for investment trusts investing in equities, or shares, between 'core' long-term holdings and 'trading' opportunities arising when a trust's shares stand on a pronounced discount below their net asset value (NAV).

With discounts - the gap between an investment trust's share price and its NAV - in this category having narrowed to an average of just 4.5% from 7.3% at the start of the year, Cade admits that value is thin on the ground.

However, he still sees some value in both Edinburgh (EDIN), a UK equity income trust trading at a 9% discount after a difficult time for fund manager Mark Barnett; and Caledonia (CLDN), the Cayzer family-backed global multi-asset fund on a 17% discount he believes is 'excessive'.

Asian and emerging markets trusts such as Edinburgh Dragon (EFM) and Templeton (TEM) on 10% discounts also look attractive, he says.

The table lists all of Numis' equity investment trust recommendations, showing when they were first tipped and a brief reason for doing so.

In his report Cade stresses that the aim of the list is to identify funds whose share price is expected to beat their stock market benchmarks, which is not the same thing as forecasting they will make a positive return. 

'The aim is not to create a model portfolio, rather to highlight opportunities within the listed funds sector,' he says.

The sectors Numis refers to are its own and do not correspond exactly with the Association of Investment Companies' categories which our articles and our own data refer to. For more information on the investment trusts use the highlighted links to their fact sheets. 

Numis’ top trust picks

Fund Sector Recommendation Date recommended Rationale
Bankers (BNKR) Global Equity Core 13 July 2017 Strong performer, attractive yield
Caledonia (CLDN) Global Equity Trading 18 July 2016 Wide discount
Monks (MNKS) Global Equity Core 9 March 2011 Baillie Gifford's best global ideas
Witan (WTAN) Global Equity Core 9 January 2017 Low-cost multi-manager
Aberdeen Diversified Income & Growth (ADIG) Defensive Core 9 January 2017 Attractive income, multi asset
Capital Gearing (CGT) Defensive Core 9 January 2017 Capital protection, zero discount control
RIT Capital Partners (RCP) Defensive Core 14 January 2015 Strong record, capital preservation
Murray International (MYI) Global Income Core 10 April 2017 Strong management record, attractive dividend
Edinburgh Worldwide (EWI) # Global Smaller Company Core 12 January 2016 Exposure to immature growth companies
Edinburgh (EDIN) UK Large Company Core 8 July 2014 Strong long-term performance, wide discount
Fidelity Special Values (FSV) UK Large Company Core 10 July 2015 Strong performance, all-company approach
Temple Bar (TMPL) UK Large Company Core 18 July 2016 Contrarian value approach
Troy Income & Growth (TIGT) # UK Large Company Core 9 March 2011 Zero discount policy, conservative approach
Aberforth Smaller Companies (ASL) UK Mid/Small Company Core 9 March 2011 Strong team with value bias
Henderson Smaller Companies (HSL) # UK Mid/SmallCompany Buy 7 July 2013 Strong record from quality growth bias
Fidelity European Values (FEV) Europe Core 13 July 2015 Solid performer
JPMorgan European Smaller Companies (JESC) # Europe Trading 18 July 2016 Good long-term record
JPMorgan American (JAM) North America Core 9 January 2017 Core US exposure, low discount volatility
JPMorgan US Smaller Companies (JUSC) North America Core 5 March 2012 Strong track record, focus on quality companies
Baillie Gifford Japan (BGFD) Japan Core 9 January 2017 Strong record via mid-cap growth
JPMorgan Japanese (JFJ) Japan Trading 13 January 2014 Improved performance, discount
Templeton Emerging Markets (TEM) Global Core 18 July 2016 Strong returns under current manager
Edinburgh Dragon (EFM) Asia Pacific Core 9 March 2011 Performance recovering
Schroder AsiaPacific (SDP)# Asia Pacific Core 9 March 2011 Solid long-term track record
Fidelity China Special Situations (FCSS) China Trading 10 July 2015 Strong stock selection
JPMorgan Indian (JII) # India Trading 10 July 2015 Well positioned for domestic recovery
VinaCapital Vietnam Opportunity (VOF) # Vietnam Trading 9 March 2011 Focused exposure, attractive discount
Worldwide Healthcare (WWH) Life Sciences Core 13 April 2012 Strong record
BlackRock World Mining (BRWM) Mining Core 9 March 2011 Exposure to global mining stocks
TR Property (TRY) Property Core 9 January 2017 Strong record
Polar Capital Technology (PCT) Technology Core 9 January 2017 Focus on disruptive technologies

# investment trust is corporate broking client of Numis Securities


In a year when the markets surged, Caledonia (CLDN) underperformed its peers but Numis still kept it on the list. The trust invests in four pools of shares - quoted equities, unquoted, funds, and income and growth - and it was the quoted portion that saw it lag.

Unquoted investments are also the reason the discount has remained consistently wide when rival global growth funds are trading around net asset value (NAV) as ‘the portfolio cannot be expected to perform in-line with markets’, said Cade.

‘We believe Caledonia offers significant value for long-term investors on its current discount of 17%,’ he said. ‘The fund pays a 2% yield and has increased its dividend for 50 consecutive years.’

Sitting in the same global equity sector as Caledonia is Monks (MNKS), which had been a laggard among its Baillie Gifford stablemates until Charles Plowden took over as manager in 2015. Since then the NAV has risen 65% against 47% for the MSCI World index and the discount has reduced from 14% to 3%.

‘While Monks future performance will not benefit from a re-rating, we continue to favour its risk profile, offering more diversified exposure to Baillie Gifford’s best ideas on a global basis,’ said Cade.

In the global defensive sector, Numis continues to back Aberdeen Diversified Income & Growth (ADIG), which was added to the list a year ago and subsequently promoted from a trading to a core buy after its switch to Aberdeen Asset Management.

Cade said it was easy to see why some were ‘sceptical’ about its prospects given its chequered history as British Assets and then BlackRock Income Strategies, however its merger with Aberdeen UK Tracker has given it ‘critical mass’.

‘It is still early days to assess performance since the new mandate was adopted on 30 March 2017, but the early signs have been promising and the managers have a good track record in an open-ended fund with a similar mandate,’ he said.

He noted the board committed to protect a 5% discount but it has narrowed to 3.6% and Cade sees ‘potential for the fund to trade on a premium given the appeal of a low volatility, high yielding vehicle’.

Edinburgh, managed by Barnett (pictured), remains a top pick in the UK Large Cap sector thanks to its ‘outstanding’ long-term record. It has had a tough couple of years and in 2016 the NAV rose just 6.7% against the FTSE All Share’s 16.8% due to a focus on defensive stocks and holdings in Provident Financial (PFG) and Capita (CPI), which both slumped after challenges to their businesses.

The trust's poor performance led to a derating and a widening of the discount to 9%. Cade says it is tempting to react to underperformance by selling but ‘we retain faith that the team’s relative performance will improve’.

‘At a time when market valuations appear full, we favour buying investment companies with experienced active managers taking a long term investment approach, rather than those focused on relative index weighting,’ he says.

Like Edinburgh, trusts in the UK smaller companies sector has not been without their troubles and Henderson Smaller Companies (HSL) was stung post-Brexit but the NAV recovered in the second half of 2016, then went on to rise 30% in 2017.

Cade said the trust is an ‘attractive core holding’ for those wanting to invest in smaller companies and manager Neil Hermon (pictured) has a strong track record and the fund benefits from low fees.

A core recommendation from Numis in the Asia ex-Japan sector is Matthew Dodd’s Schroder AsiaPacific (SDP). Its focus on quality companies with strong balance sheets, healthy cashflows, and good corporate governance all at an attractive valuation saw NAV grow 39% last year and the fund consistently achieves top quartile performance.

Edinburgh Dragon (EFM) wasn’t so successful, with an underweight to China pushing it to underperform last year - NAV grew 25% against the MSCI Asia ex-Japan index return of 29.5%.
Last year, the board commissioned a consultancy to evaluate its investment style due to concerns about ongoing performance but the conclusion was it was ‘not broken’, said Cade.

Elsewhere in Asia, Vietnam is well-placed to ‘maintain a healthy pace of growth in the next few years’, said Cade, thanks to its young and growing workforce and foreign investment remaining strong.

He said VinaCapital Vietnam Opportunities (VOF) reaches parts of the market other trusts can’t and although its ‘short term performance will tend to lag in a rising equity market, as was the case in 2017’, it will perform longer term.

It was hit last year by a high cash weighting and exposure to unlisted companies.

Cade said over the long term it will have ‘lower NAV volatility than the market or its peers’ and there will be ‘scope for a significant narrowing of the fund’s discount, which is supported by an active buyback policy and the recent introduction of the a semi-annual dividend of 2% of NAV, equivalent to a yield of 2.4%’.

Out of the specialist sectors, healthcare had a tough 2016 but bounced back in 2017, delivering strong growth despite the volatility in the biotech stocks, which suffered a sharp derating in October.

On top of tricky stock markets, Worldwide Healthcare (WWH) had to contend with manager, and managing partner of OrbiMed Capital, Sam Isaly stepping down amid sexual harassment allegations. Although Isaly was an experienced investor who had grown the trust 16.3% a year since launch in April 1995 versus 11.5% for the MSCI World Healthcare index, Cade is confident it can continue to do well without him.


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