Strong managers, cheap shares': Winterflood unveils trust tips for 2021

‘Strong managers, cheap shares’:
Winterflood unveils trust tips for
2021
By Gavin Lumsden 08 Jan, 2021
omments

(Trusts marked * are corporate broking clients of Winterflood Securities.)

Winterflood analysts have added 15 investment trusts and dropped a
dozen more in their New Year review of their closed-end fund
recommendations.

Simon Elliott, head of investment companies research, said the overhaul
followed a difficult year for the broker’s model portfolio of investment
companies, which suffered badly in the first quarter pandemic crash but
recovered strongly at the end of the year to end 2020 9.5% up.

This beat the 3.6% gain in the composite benchmark Winterflood uses to
measure its performance. Since the portfolio began in 2016 it says it has
achieved an average annual return of 12.9%, also ahead of the 9%
annualised gain in the index.

The model portfolio now contains 38 investment companies, up from 34 a
year ago, divided into two broad types: ‘funds managed by proven
managers with strong long-erm performance records and funds that offer
a value opportunity’, Elliott said.

Murray’s Luke a dividend ‘torchbearer’
In UK equities, Winterflood has increased its recommendations from six to
eight to capture the ‘substantial opportunity’ it sees in a stock market
that has endured prolonged underperformance since the Brexit
referendum four years ago.

Aurora (ARR), the first of two additions, is a concentrated, deep value
portfolio whose exposure to the domestic economy Winterflood expects
will benefit from improved investor sentiment to the UK after the signing
of a Brexit deal with the EU.

Odyssean* (OIT), which like rival Strategic Equity Capital (SEC) takes a
private equity style approach to investing in small companies that can be
improved, is the second addition. ‘We see this as less of a beta or UK
recovery play and more of a bet on the managers’ ability to invest in
quality companies on attractive valuations,’ said Elliott.

In UK equity income, the analysts have switched from Dunedin Income
Growth (DIG) to sister trust Murray Income (MUT) after its
‘transformational merger’ with Perpetual Income & Growth* (PLI). Elliott
declared Charles Luke (pictured), manager of the now £1bn trust as ‘a
natural successor to Job Curtis, the veteran manager of City of
London (CTY) as the torchbearer for the UK Equity Income investment
trusts that offer dependable and growing dividends’.

In UK smaller companies, Winterfloods has replaced Harry
Nimmo’s Standard Life UK Smaller Companies* (SLS) with Neil

Hermon’s Henderson Smaller Companies (HSL) on valuation groups.
SLS sits on a tight 3% discount compared to HSL’s 8% deficit to NAV.
The four trusts sit alongside existing recommendations
of Mercantile* (MRC), Fidelity Special Values* (FSV), Law
Debenture (LWDB) and Baillie Gifford UK Growth* (BGUK).

Witan replaces Bankers
In international equities, Winterflood has swapped Bankers (BNKR) with
global multi-manager rival Witan (WTAN) whose difficulties in the first
half of last year had sped up changes in its manager line-up that were
already improving performance. ‘While it has already been partially re-
rated, we can envisage there is more to come,’ Elliott commented about
the £1.8bn trust currently on a 5% discount.

In Europe, the broker’s analysts have switched from Henderson
Eurotrust (HNE) to stable mate TR European Growth* (TRG). Although
HNE enjoyed a good year under new fund manager Jamie Ross, Elliott
said the Ollie Beckett managed TRG offered ‘greater opportunity’ with its
small and mid-cap portfolio likely to benefit from an economic recovery,
particularly as the shares looked good value on a discount of 11% below
net asset value. HNE stands on a 7% discount.

Similarly, in Japan former sector leader Baillie Gifford Japan (BGFD) has
made way for JPMorgan Japanese (JFJ) which Winterflood believed
offered better value on a small discount compared to the former’s 8%
premium. ‘JPM Japanese has developed a strong track record under
Nicholas Weindling and Miyako Urabe and shares many of the growth-
oriented investment themes of its closest peer,’ Elliott explained.

In Asia, Elliott reversed a switch he made a year ago, dropping Asia
Dragon Trust* (DGN) in favour of Schroder Asian Total Return (ATR),
whose small premium he believed was justified by its strong performance
and policy of limiting its discount to 5%. ‘In our opinion, the fund’s
mandate is attractive in the current environment given its ability to
protect investors’ capital in difficult market conditions,’ he said.

A premium re-rating in the shares of JPMorgan Asia Growth &
Income (JAGI) since it adopted a higher dividend four years ago has
prompted Winterflood to try and repeat the same trick, replacing it
with Invesco Asia Trust (IAT) which followed suit with an ‘enhanced’
distribution policy last August but still languishes on a 10% discount.

Augmentum Fintech (AUGM), the last of the changes in this category,
has been added on a high 17% premium. Despite a major re-rating after
a difficult start to 2020, Elliott said this reflected the progress being made
in the portfolio of unquoted financial technology disrupters, which he

thought would produce one flotation or buyout to crystallise gains for
shareholders this year.

It sits alongside Winterflood’s existing specialist recommendations
of Allianz Technology* (ATT), BlackRock World Mining* (BRWM)
and Worldwide Healthcare* (WHH).

Elsewhere, Harbourvest Global Private Equity (HVPE), Standard Life
Private Equity* (SLPE), JPMorgan Emerging
Markets (JMG), Templeton Emerging Markets* (TEM), Martin Currie
Global Portfolio (MNP) and Scottish Mortgage (SMT) were also retained.

Bonds and property
Winterfloods has trimmed its bonds recommendations from five to four,
removing CVC Credit Partners European Opportunities* (CCPE)
and TwentyFour Income (TFIF) and adding NB Global Monthly
Income (NBMI) after it abandoned its focus on floating rate debt last
year. Elliott said its’ new strategy offers interesting exposure to a broad
range of credit sectors and we see potential for the fund to be re-rated as
its monthly dividend increases following the transition.’
These sit alongside unchanged recommendations for BioPharma
Credit (BPCR), City Merchants High Yield* (CMHY) and Henderson
Diversified Income (HDIV).

In commercial property the analysts made two changes. Among
mainstream, heavily discounted UK real estate investment trusts, they
now prefer Standard Life Investments Property Income* (SLI)
over BMO Commercial Property Trust (BCPT) for its higher industrial
weighting, lower retail exposure and better dividend prospects.

Among specialist UK Reits, the broker plumped for Civitas Social
Housing (CSH) over rival Residential Secure Income (RESI) because the
dividend behind its prospective 5.1% yield is fully covered. ‘Civitas offers
an interesting opportunity for investors looking for secure income from a
UK real estate portfolio and we believe that the portfolio’s long-term,
inflation-linked leases are appealing,’ Elliott argued.
Tritax Eurobox (EBOX) and TR Property (TRY) had also been retained,
he said.

Capital Gearing ousts RIT
Winterflood has upped the number of defensive trusts whose low volatility
or correlation with mainstream stock markets make them attractive safe
havens. The addition of Greencoat UK Wind (UKW) alongside BBGI
Global Infrastructure* (BBGI) comes as the renewables fund trades on a

high but reduced premium of 11% over NAV. ‘Electricity prices have
recovered since their low in March 2020 and this should be positive for
the fund, which offers an attractive yield and is expected to cash cover its
2020 dividends 1.3 times,’ Ellott assured.

Shares in the Rothschild-backed RIT Capital Partners (RCP) have been
too volatile for a capital preservation fund so Winterflood has opted
for Capital Gearing Trust (CGT), which has grown to £610m on the back
of its zero-discount policy and shrewd asset allocation. ‘The fund has
undoubtedly been one of the success stories of the sector over the last
few years,’ said Elliott.

BH Macro (BHMG) and Personal Assets (PNL) complete the defensive
line-up and Winterflood’s portfolio for this year.