Aberforth Smaller Companies, Temple Bar and British Empire are among investment trusts value-orientated investors should consider in 2018, according to Kepler Trust Intelligence’s Alex Paget (pictured). 
Last week, Paget said the drivers for the outperformance of the value style have not gone away despite losing out to growth strategies in 2017.
As such, the Kepler Trust Intelligence analyst has picked out five trusts – British Empire, Lazard World, Aberforth Smaller Companies, Gabelli Value Plus and Temple Bar – for investors to consider in the event the style returns to favour.
British Empire Trust
The first trust on Paget’s list is British Empire Trust, which the analyst noted has been a net beneficiary when bond markets have corrected in the past.
The £833.9m fund invests in companies whose share prices are trading at a discount to estimated underlying net asset value.
The portfolio It is 51 per cent weighted to industrials and 44 per cent weighted to mutual funds, and, as Paget notes, it differs from most global funds due to the types of companies it focuses on.
“The companies the fund focuses on can be split into three buckets: family-controlled holding companies, closed-ended funds and asset-backed special situations.”
“All of those companies have the common feature of owning portfolios of businesses or assets, either listed or unlisted, that can be independently valued.”
Performance of fund vs sector and benchmark since 2015
Source: FE Analytics
British Empire Trust biggest holding is a basket of 20 Japanese special situations stocks, represenging 10.6 per cent of the portfolio.
It also has holdings followed by Pargesa Holding, Tokyo Broadcasting System, Riverstone Energy and Italian investment company Exor.
Joe Bauernfreund became lead portfolio manager of British Empire Trust in 2015, having worked on the portfolio since 2002.
“Bauernfreund honed the investment process in 2002 and this has been a major contributor to the trust’s recent outperformance,” Paget said.
Since Bauernfreund was appointed manager, the trust has returned 69.18 per cent, outperforming its average peer in the MSCI AC World index and its own benchmark, the MSCI AC World excluding USA. The trust is currently trading at a discount of 11 per cent to net asset value (NAV), according to data from the Association of Investment Companies (AIC), is 2 per cent geared and has ongoing charges of 0.86 per cent.
Gabelli Value Plus Trust
Paget’s next pick is the £127.9m Gabelli Value Plus Trust, a US equity portfolio which has a “very high active share” and a wide-ranging all-cap approach.
“The trust taps into the Private Market Value - the value an informed buyer would be willing to pay to acquire an entire company in a private transaction- with a Catalyst’ investment strategy,” he explained.
“We think the trust is an interesting play on the US market at this stage, offering uncorrelated exposure and a focus on absolute returns which may prove attractive given today’s high valuations.”
The trust stands to benefit from increased M&A activity in the US, as companies onshore their money in the wake of US president Donald Trump’s tax changes, and from a positive outlook for domestically focused US stocks – which are a core focus for the trust.
The fund’s largest sector exposure is to industrials with a 29.4 per cent, followed by consumer discretionary (23.4 per cent) and financials (16.6 per cent) with top holdings including responsible waste disposal provider Republic Services, Bank of New York Mellon, PNC Financial Services Group and Herc Holdings.
The trust is trading at a discount of 4.5 per cent, and has an ongoing charges figure of 1.33 per cent, data from the AIC shows. It currently has no gearing
Aberforth Smaller Companies
The largest investment trust in the AIC’s UK Smaller Companies sector – Aberforth Smaller Companies – is Paget’s third pick.
The trust has been run by Alistair Whyte and Richard Newbery since 1990, with Euan Macdonald and Keith Muir joining the team in 2011 and latterly Chris Watt and Peter Shaw in 2016.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
“Aberforth Smaller Companies has an outstanding long-term track record stretching back to 1990, managed by a highly experienced and deeply anchored team with more than 70 years of experience on this trust alone.”
“The six-strong management team, who are all partners at Aberforth, pursue a bottom-up approach to the market.”
Paget noted the fund is differentiated from its peers by the fact it is an out-and-out value portfolio, with the managers focusing on what they deem to be undervalued companies.
Over the past 12 months, the team have added numerous domestically-facing stocks to the portfolio thanks to share price declines following the EU referendum, which means, at the margin, the trust’s overall exposure to the UK consumer has increased.”
Examples of the recent holdings added to the portfolio include restaurants and bars’ operators Mitchells & Butlers, public transport provider Stagecoach Group and housebuilding company Bovis Homes.
“The managers believe there are various parts in place that suggest value investing can come out of its pro-longed bear market – though they admit they have no clue as to when this rally will occur.”
“One particular driver would be higher bond yields and our analysis suggests rising bond yields would be a boon for the trust, with the chart below showing how tightly correlated the trust’s NAV returns (relative to the index) have been to the movement in 10-year gilt yields.”
The trust has ongoing charges of 0.76 per cent, is trading on a 12.4 per cent discount to NAV and is not geared.
Lazard World Trust
The fourth value-oriented trust on Paget’s list is Lazard World Trust, which invests primarily in investment trusts and investment companies, as well as asset backed holding companies with similar characteristics.
“The fund aims to identify situations where there is a catalyst for change which has not been identified by the wider market, or where there is an opportunity via corporate governance to actively improve shareholder returns,” said the Kepler analyst.
Discount/premium over 5yrs
Source: FE Analytis
According to Paget, the fund’s size, which is £147.4m, has discouraged discretionary fund manager buyers.
Its relatively complex nature compared with other trusts, has also led to the fund having a relatively low profile among private investors.
However, the board has taken steps to address those issues, introducing a dividend in mid-2016 that led the trust to yield 3.35 per cent.
“This new income feature combined with the trust’s recent strong performance means it has seen its discount narrow in the last year, coming in from an average of around 12 per cent in 2016 to a range of 6-8 per cent in the final half of 2017.”
The trust is 41 per cent weighted to Asia Pacific equities, with top holdings including Fidelity China, JP Morgan Japanese, JP Morgan Japan Smaller Companies and JP Morgan Emerging Markets.
Data from the AIC shows Lazard World Trust is trading at a discount of 4.5 per cent, has no gearing and ongoing charges of 1.35 per cent.
Over three years, the trust has returned 63.30 per cent compared to its average peers in the IT Global sector total return of 57.09 over the same period.
Temple Bar
Lastly, Temple Bar is a large-cap UK equity focused portfolio managed by contrarian investor Alastair Mundy since 2000.
Mundy, known for his bearish views on the equity market, argues that central banks’ policies, such as QE, have had “little effect on the real economy except distorting asset prices”.
“He aims to own stocks that have fallen at least 50 per cent from their five-year peak and impose a strict due diligence process to reach a ‘fair value’ estimate,” said Paget.
“If there are not enough investment opportunities via Alastair’s process, the manager is happy to allow his cash weighting to build up over time.
“The fact the trust’s cash weighting stand at 18 per cent highlights how little value the manager currently sees in the market.”
Performance of trust vs sector & benchmark over 10yrs
Source: FE Analytics
The trust has delivered a 177.66 per cent return over 10 years, compared with a 92.85 percent gain for the FTSE All Share index and 91.41 per cent return for the average IT UK Equity Income trust, as the chart above shows.
However, Kepler’s Paget noted that recent market conditions have not been conducive to the trust’s distinctive value style.
The portfolio is heavily weighted to economically sensitive stocks such as large-cap energy (Royal Dutch Shell and BP), UK banks (HSBC, Barclays, RBS and Lloyds) and other consumer-facing businesses.
Temple Bar is trading at a 4.8 per cent discount to NAV and has an OCF of 0.52 per cent. It is not geared and has ongoing charges of 0.52 per cent.