Nine selected trusts as UK smaller companies regain favour

In our quarterly multi-manager series we reveal the funds and trusts selected by a panel of leading multi-managers. Rather than build their portfolios by investing in individual stocks or bonds, these managers invest largely or exclusively in investment funds and trusts, leaving them well placed to identity future winners.

This quarter Europe and Japan have emerged as firm favourites, as the regions continue to power ahead in otherwise uncertain and volatile global markets thanks to supportive economic policies and favourable equity valuations. UK smaller companies also appear to be slowly regaining favour, particularly with our investment trust managers, after a painful rout in 2014.

As has been the case over recent quarters, Asia and emerging markets continue to divide opinion, with our contrarian investors taking a punt on bombed-out valuations while our more conservative fund pickers are avoiding the region like the plague, fearing volatile politics and the Fed's impending rate rise. Fixed income also remains an investment pariah, as our managers allocate to bonds over the shortest term possible.

Max King, Investec Asset Management

Ever the contrarian, Max King makes Money Observer Rated Fund Fidelity China Special Situations his first fund pick. Launched by investment legend Anthony Bolton in 2010, the trust has been managed by China expert Dale Nicholls since April 2014, since when it has delivered strong returns.

More recently, however, the trust has been hit hard by China's stockmarket crash, shedding more than 20% in the month to 29 July. Nonetheless, King says: "With an excellent long-term record, this may be the contrarian opportunity worth buying early."

Since this article was written and appeared in the September issue of Money Observer, Fidelity China Special Situations has lost even more. However, as its NAV has also plummeted, its share price discount has in fact narrowed to 12%,creating a potential buying opportunity.

King describes global investment trust Hansa Trust, another unconventional choice, as a "win-win opportunity". Hansa is currently trading at a deep share price discount to net asset value, thanks to its investment in Brazilian shipping company Ocean Wilsons.

However, King says: "The Brazilian business has weathered economic and political problems well, while the team has done a good job in sorting out the rest of the investment portfolio into one that resembles a junior version of RIT Capital."

A firm favourite among our panel, the Biotech Growth Trust is also backed by King despite assertions by market pundits that the biotechnology sector is looking overvalued.

He says: "Biotech Growth has returned a compound 40% a year for five years, but Sven Borho, a partner at the trust's manager Orbimed, points out that performance has been driven by earnings growth, not re-rating. Given the acceleration in innovation in recent years, the shares still look attractive."

Peter Hewitt, F&C Managed Portfolio Trust

This quarter F&C's Peter Hewitt is particularly fond of UK smaller companies, which have made a remarkable recovery following a disappointing 2014. His first fund pick is the Miton UK MicroCap Trust. Launched around the same time as Woodford Patient Capital in April, the trust was somewhat overlooked by the majority of investors.

However, Hewitt has faith in its manager, small-cap expert Gervais Williams, claiming the micro-cap trust is well-placed to capture returns in what he believes is currently one of the most interesting and undervalued areas of the UK market.

In the more mainstream UK smaller companies category Hewitt has chosen BlackRock Throgmorton Trust.

"UK smaller companies valuations are more attractive than larger companies, albeit not quite as cheap as the micro caps. The trust to highlight would be Blackrock Throgmorton Trust, which has exposure to medium-sized as well as smaller companies, is well-managed and has a good performance record."

Managed by Mike Prentis since 2008, the trust returned 151% in share price returns in the three years to 29 July.

Unlike King, Hewitt is decidedly bearish on emerging markets. He cites the slowdown in China as a key reason, while continued underperformance in Brazil and Russia is also a concern.

"Valuations across the area have become cheaper, but doubts over the earnings outlook for many companies, especially those involved in the commodity sector, could prove a headwind for share prices," he says.

However, for those looking for exposure, he suggests Genesis Emerging Markets for its "diverse spread of investments" and "strong long-term performance record".

Peter Walls, Unicorn Mastertrust

Unicorn's investment trust expert Peter Walls chooses Monks Investment Trust as his first fund pick, citing a recent management change.

"Performance has been disappointing for a number of years and shareholders were getting restless. The proactive stance taken by Baillie Gifford has been applauded and the new 'global alpha' management team led by Charles Plowden is now in charge. If the new team can replicate the long-term success of their strategy, investors should benefit from a narrowing discount," he says.

Undeterred by an increasingly negative consensus outlook for emerging markets, Walls has also chosen Money Observer Rated Fund Templeton Emerging Markets. Again, this is driven by a management change, as Mark Mobius is set to hand the reigns over to Carlos Hardenberg in October.

At the opposite end of the value spectrum is Money Observer Rated Fund Strategic Equity Capital. The UK smaller companies trust has produced stellar returns over the past five years by investing in publicly traded equities using private equity techniques; however, this - combined with a supportive general election result - has propelled shares to a big premium to net asset value.

While this excludes it from Walls's buy list for now, the manager says he will be keeping his eye on a rumoured share placing.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.