Brexit or Bremain? 10 trusts to beat Friday's rush

If the UK votes to remain in the European Union (EU), broker Winterflood expects a relief rally, which has arguably already started. A strong short-term fillip to mid and small-cap companies - which experienced stronger outflows and volatility in the run up to the referendum - is to be expected.

Winterflood argues that investment trusts are a good way of playing any such rally due to the impact of gearing and the possibility that discounts might narrow as a result of renewed buying interest.

'Bremain'

The broker's favoured trusts are the Mercantile Investment Trust and Henderson Smaller Companies. Both offer some value on discounts of 13% and 14% respectively to their net asset value.

Mercantile has the advantage of greater liquidity with a market cap of £1.6 billion, although Henderson Smaller Companies also offers good liquidity in the secondary market and has a market cap of £452 million.

The bounce would extend beyond small- and mid-cap to include more mainstream UK trusts such as Temple Bar (7% discount) and Fidelity Special Values (3% discount).

Not only would the UK market rally, but a vote to remain would also strengthen confidence in all of Europe, according to Simon Elliott and Kieran Drake, research analysts at Winterflood.

They expect such trusts as Jupiter European Opportunities (3% discount) and TR Property (7% discount) to benefit.

'Brexit'

If the UK votes to leave the EU, a negative reaction from equity markets and a sell-off in sterling are to be expected, according to Winterflood. But stockbroker Stifel argues sterling is expected to be volatile in the next few days, whatever the result of the referendum.

"A sizeable stockmarket crash cannot be discounted, but even in the event of a more moderate sell-off it seems reasonable to assume that discounts will widen across the investment trust sector," says Elliott from Winterflood.

In the event of a Brexit, he expects that certain trusts will outperform, including Personal Assets, which invests in a wide range of asset classes including equities, index-linked bonds and gold.

The trust has a zero-discount policy and therefore the risk of discount volatility is eliminated.

A Brexit could lead to further central bank intervention, says Elliott, including in the bond market. This would indirectly benefit City Merchants High Yield (3% premium), which invests in high-yield credit and is predominantly exposed to European issuers.

Another ramification of Brexit is that there would be substantial movements in currency markets.

Pantheon International is an interesting post-Brexit opportunity because of its exposure to US dollar denominated assets and its already wide discount, currently 27%.

Another beneficiary of currency movements against sterling could be Baillie Gifford Japan (2% discount).

The Japanese yen is also seen as a safe currency in times of market stress and has already appreciated by 13% against sterling so far this year.

This article was originally published by our sister magazineMoney Observer here.

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