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Trust Tips: Winterflood prunes New Year recommendations

Winterflood Securities takes profits and makes some big calls on its investment trust recommendations in anticipation of a rougher time for stock markets.

Ten out, five in

The first half of 2017 has been good for Winterflood Securities’ (New Year investment trust tips) with 34, or 83%, of the broker’s 41 recommendations at the start of the year beating their stock market index benchmark. As a result the model portfolio based on these funds is up 11%, beating the 4.2% gain in the FTSE UK Private Investor Balanced Index.

Simon Elliott, Winterfloods’ head of investment companies’ research, said his team was tempted not to meddle but after a mid-year review decided to prune the list by removing 10 funds that had begun to look expensive and replacing them with five new funds that looked better value.

Many of Winterflood’s comments on trust valuations focus on whether their shares trade at a premium above their underlying net asset value (NAV) or a discount below NAV.

A backdrop to a lot of the broker’s changes in its review is the fact that stock markets are at all-time highs, raising the risk of a retreat that could hurt the share prices of some higher valued trusts.

Next: UK – Hermon out, Barnett in

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UK – Hermon out, Barnett in

The move to a more concentrated portfolio saw Winterflood drop Dunedin Income Growth (DIG), and Henderson Smaller Companies (HSL), in the UK and replace them with Perpetual Income and Growth (PLI), River and Mercantile UK Micro Cap (RMMC), and BlackRock Smaller Companies (BRSC).

Although Dunedin's performance has improved and still offers good value on a 9% discount, a shift by manager Ben Ritchie to mid-cap growth stocks made it similar to Perpetual Income, a corporate broking client of Winterflood's run by Mark Barnett, which the broker prefers for this area of the market.

On the decision to remove Henderson Smaller the broker comments: 'While we continue to rate the manager, Neil Hermon [pictured], highly, we are looking to reduce our UK small cap exposure and find that River & Mercantile UK Micro Cap [a corporate broking client] and BlackRock Smaller Companies offer more attractive long-term growth opportunities. In addition the current discount of 13% does not offer particular value relative to its 12-month average of 15%.'

Winterflood maintains its other UK recommendations: Fidelity Special Values(FSV), Woodford Patient Capital(WPCT), a corporate broking client it believes is making progress after a difficult 2016, Finsbury Growth & Income (FGT), also a corporate customer, and Temple Bar (TMPL).

Next: goodbye British Empire

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Goodbye British Empire

In the global sector Winterflood has replaced British Empire (BTEM) and JPMorgan Global Growth & Income (JPGI), – both corporate broking clients – with Law Debenture (LWDB).

British Empire has had a strong 12-months as its focus on undervalued investment companies and family-controlled businesses around the world has come back into favour. However, with markets at peaks Winterflood is concerned a downturn could see these gains reverse, particularly if its investments start to trade at wider discounts to their underlying asset values. 'The fund's discount has failed to narrow this year, despite shares worth over £33 million being bought back,' it notes.

The JPMorgan trust has seen its discount narrow considerably since it upped dividend payments last year so Winterflood is switching to Law Debenture, on a 12% discount and a 2.9% dividend yield. The broker says Law Debenture is a 'unique' trust with an equity portfolio managed by James Henderson alongside a successful fiduciary services business.

'We believe that the fund benefits from the revenue that its subsidiary generates and allows its investment manager greater flexibility in stock selection,' Winterflood said.

The broker's other global picks are Scottish Mortgage Trust (SMT), and Monks (MNKS), both managed by Baillie Gifford.

Next: HEFT too hot

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HEFT too hot

Winterflood made one change in Europe, dropping John Bennett's Henderson European Focus Trust (HEFT). Although a strong performer, the shares have re-rated to trade at a 3% premium, compared to their average 4% discount of the past 12 months.

With other European trusts trading at an average 3.5% discount, the broker believes there is a risk of HEFT shares following suit in a stock market retreat.

It continues to back HEFT's smaller company stable mate TR European Growth (TRG) and Fidelity European Values (FEV). Both are corporate broking clients.

Next: Switch to Biotech Growth

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Switch to Biotech Growth

Among specialist equity trusts, Winterflood has switched horses in the Orbimed stable, moving from Worldwide Healthcare (WWH) to Biotech Growth Trust (BIOG). Both are broking clients of Winterflood.

The analysts note that the US political rhetoric on drug pricing has died down since the presidential election. While valuations in the healthcare sector remain subdued, the growth prospects of biotech look good with the added attraction that Biotech Growth is trading at the lower end of its discount range. 'Downside discount risk is also mitigated by the directors' commitment to maintain a 6% discount floor through share buybacks.'

Winterflood's other specialist trust tips are: Allianz Technology (ATT) and BlackRock World Mining (BRWM).

Next: Shin Nippon for Japan

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Shin Nippon for Japan

In Japan, Winterflood has also switched trusts within the same management group, replacing Sarah Whitley's Baillie Gifford Japan (BGFD) with Baillie Gifford Shin Nippon (BGS). Both have strong track records and trade at small premiums, which means neither are value opportunities, although the broker believes the large numbers of wealth managers and private investors now holding the shares should support their ratings.

Shin Nippon is the 'standout performer' of the sector, says Winterflood, adding: 'This fund, which has been managed by Praveen Kumar since December 2015, benefits from the same experienced team and we believe offers better prospects for long-term growth as a result of its small and mid-cap focus.'

Next: Hugh Young out

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Hugh Young out

In the wider Asia region, Winterflood has removed Hugh Young's Aberdeen Asia Income (AAIF) after losing faith in the ability of former star manager (pictured) to return to winning ways. Although a 7% discount merits attention, it says it has more conviction in other trusts in the portfolio.

'Despite our expectation at the beginning of the year that the fund would be well positioned to benefit from the return to favour of value investing, it has failed to outperform the benchmark and Henderson Far East Income (HFEL) [a close rival on a 2.5% premium] so far in 2017.'

It also switched from Fidelity Asian Values (FAS), whose discount tightened from 7% to 3% despite underperforming the MSCI AC Asia ex Japan index in the first half. In its place it chose Fidelity China Special Situations (FCSS), whose discount widened slightly to nearly 13% despite manager Dale Nicholls beating the MSCI China index this year.

'In our opinion, the manager's strong performance record, the positioning of the portfolio towards China's 'new' economy, the deep resources of Fidelity, and the current discount make Fidelity China Special Situations an attractive option,' Winterflood said.

Next: exit Pantheon, hello HICL

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Exit Pantheon, hello HICL

Private equity investment trusts have performed strongly and with discounts in the sector having shrunk significantly, Winterflood is scaling back its exposure by dropping Pantheon International(PIN), although it continues to recommend HgCapital Trust (HGT) and Standard Life Private Equity (SLPE), a corporate broking client.

'While the fund is undoubtedly well managed and has a good long-term performance record, its portfolio is very broadly diversified and we feel that it offers less potential for genuine outperformance of public markets. Its fee structure also makes it look expensive relative to our other fund of funds recommendations, Standard Life Private Equity,' it said.

Turning to other 'alternative' asset classes, as previously reported, Winterflood has added HICL Infrastructure (HICL) to its model portfolio following a contraction in the £2.9 billion fund's premium to 7% in recent weeks. This compares to a 12-month average premium of 16% and leaves the shares yielding 4.9%. 'In our view this looks to be an attractive entry point and the fund looks to offer relative value within the listed infrastructure sector,' the broker said.

Next: and the rest

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And the rest

Here are all the other trusts recommended by Winterflood which it continues to hold in its model portfolio:

Emerging markets: BlackRock Frontiers (BRFI), Templeton Emerging Markets (TEM).

Bonds/Debt: City Merchants High Yield (CMHY), CVC Credit Partners European Opportunities (CCPG), JPMorgan Global Convertibles Income(JCGI), TwentyFour Income Fund (TFIF) and Real Estate Credit – Preference Shares (RECILN)

US: JPMorgan American (JAM) and North American Income Trust (NAIT).

Wider Asia: Schroder Asian Total Return (ATR).

Property: F&C Commercial Property (FCPT) and TR Property (TRY).

Defensive/Hedge Funds: Capital Gearing (CGT), Personal Assets (PNL), John Laing Environmental Assets (JLEN) and Highbridge Multi Strategy (HMSF).

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