Troy Income & Growth, Aurora Investment Trust and Mercantile Investment Trust are among the UK equity investment trusts that Winterflood Investment Trusts has added to its model portfolio for the year ahead.
The research house has made a number of changes to the UK bucket of its model portfolio for 2018, resulting in several additions and some trusts exiting.
Indeed, the research firm has removed 12 holdings from the portfolio in total adding 11 new names across a range of sectors.
According to the firm, 34 of its 47 funds and securities outperformed the relevant index over the period they were on its recommendation list.
Overall, the model portfolio delivered a total return of 19 per cent and outperformed the FTSE UK Private Investor Balanced benchmark’s gain of 10 per cent, noting the positive impact of its bias to growth strategies and mid- and small-cap trusts in the UK and Europe.
“Last year was a good year for investors in investment companies,” the research firm noted. “The majority of funds delivered outperformance, particularly those with growth-orientated mandates, and discounts tightened to historically narrow levels.
“However, this success presents a challenge when collating our recommendations for 2018. Value is thin on the ground, while the risk of discount volatility in the eventuality of more difficult market conditions has increased.”
Performance of trust vs index in 2017
Source: FE Analytics
From its UK bucket, River & Mercantile UK Micro Cap was one of its most successful picks, with its share price rising by 62.17 per cent and showed the strongest relative performance against a benchmark: Numis Smaller Companies & AIM (ex Investment Companies) index.
Conversely, one of the worst performers was also from its UK bucket: Woodford Patient Capital.
The trust managed by FE Alpha Manager Neil Woodford recorded a loss of 6 per cent during 2017, lagging the FTSE All Share’s 13 per cent total return. Winterflood noted that disappointing NAV performance last year had been compounded by discount widening, however, it remains among its recommended UK equity trust.
Despite its strong performance in 2017, Winterflood analysts have chosen to remove the River & Mercantile trust from the model portfolio, replacing it with Mercantile Investment Trust.
They explained: “As River & Mercantile UK Micro Cap is now trading at a small premium to NAV, we have switched to Mercantile Investment Trust, which we believe offers a better value opportunity on its current discount of 9 per cent.”
Highlighting a tightening of the discount last year, Winterflood noted that further downside discount volatility for the trust – managed by Martin Hudson, Anthony Lynch and Guy Anderson – is limited by its active share buyback policy, with share capital worth £117m bought back since the start of 2017.
“The fund struggled in the second half of 2016 as a result of being overweight UK consumers at the time of Brexit and also being underweight energy and resources, although relative performance significantly improved during 2017, with the NAC up 30 per cent versus [the peer group’s] 18 per cent,” the analysts wrote.
Elsewhere in the model portfolio, the firm has switched Nick Train’s Finsbury Growth & Income trust from its UK Equity Income holdings to the five FE Crown-rated Troy Income & Growth trust, managed by FE Alpha Manager Francis Brooke and Hugo Ure.
Performance of trust vs sector & benchmark in 2017
Source: FE Analytics
“While we continue to rate Nick Train, the manager of Finsbury Growth & Income, very highly, we have decided to switch to Troy Income & Growth to gain more diversified exposure to UK equities with a higher yield,” Winterflood analysts wrote.
“In addition, the risk of premium/discount volatility is alleviated by the fund’s well-established zero discount policy.”
They added: “While performance relative to its investment trust peer group has been less impressive, it has been delivered with one of the lowest levels of volatility within the UK equity income peer group.
“We continue to believe that the fund represents an attractive, lower risk option within the UK equity income peer group.”
Finally, the firm has switched out of FE Alpha Manager Alex Wright’s Fidelity Special Values into the Aurora Investment Trust managed by Gary Channon in the AIC UK All Companies sector.
“We continue to believe that Alex Wright’s unconstrained value/contrarian investment approach is well-suited to the investment trust structure and acknowledge the strong performance that it has delivered for Fidelity Special Values,” the analysts wrote.
“However, we have added Aurora in order to gain access to Phoenix Asset Management’s fundamentally-driven contrarian investment approach, which has delivered impressive long-term returns for the equivalent open-ended fund.”
The open-ended Phoenix UK fund has delivered an annualised net return of 10 per cent since launch in 1998 compared with 5.5 per cent for the FTSE All Share index.
While Aurora has underperformed since Phoenix took over in January 2016, this was largely attributed to its high cash weighting and exposure to UK domestic holdings in the aftermath of the Brexit referendum vote.
Indeed, Winterflood noted that it outperformed both the peer group and benchmark in 2017, delivering an NAV total return of 20 per cent.
Performance of trust vs sector & benchmark in 2017
Source: FE Analytics
“We believe that Aurora has the potential to outperform over the long term, albeit we would expect there to be periods of significant volatility given the portfolio concentration,” the firm explained.
“Furthermore, the fund is likely to be sensitive to the UK’s economic cycle as a result of its current focus on consumer stocks.”
As well as Woodford Patient Capital, Winterflood continues to recommend Perpetual Income & Growth and Temple Bar in the UK Equity Income sector and BlackRock Smaller Companies from the UK Smaller Companies sector.