13 top investment trust picks for 2017

Analyst Winterflood has named a range of investment trusts that it predicts are well-placed to outperform their peers on an 18-24 month time horizon, either through a narrowing of the discount or outperformance.

Winterflood, which has created model portfolios out of the trusts it recommends, is 'underweight' the UK and 'overweight' in Europe, Asia and emerging markets, as well as being slightly 'overweight' in North America.

UK equities

In the UK equities space, the broker recommends Fidelity Special Values. The trust has performed strongly under Alex Wright; since he was appointed manager in September 2012, the fund's net asset value (NAV) is up 107%, comparing favourably with a 51% rise in its benchmark, the FTSE All Share.

Simon Elliott, research analyst at Winterflood, says: "In our opinion, Wright's unconstrained value/contrarian investment approach is well suited to the investment trust structure.

"The portfolio's significant mid and small-cap bias and the fund's ability to short sell make it an inherently higher-risk proposition.

"However, for investors who are comfortable with these risks we believe it is attractive and would expect it to outperform over the longer term."

Woodford Patient Capital, from the Association of Investment Companies (AIC) UK all companies sector, is also recommended.

DIG could be a value play, on a 10% discount with a large-cap portfolio and 4.6% yieldWoodford has already backed a number of public and private early-stage and early-growth companies on the basis of significant upside potential, and he believes a lack of financing for these companies has opened a valuation opportunity.

Performance over the past year has been sluggish, however, with the NAV up 0.3%, while the share price is showing losses of 7.7%, according to analyst FE Trustnet.

Winterflood regards Dunedin Income Growth (10% discount) as an attractive value play, particularly given its mainstream large-cap portfolio and yield of 4.6%. The broker has also chosen Finsbury Growth & Income "in recognition of the quality of its underlying holdings".

In contrast to its trust picks in 2016, it has switched from the Mercantile Investment Trust into BlackRock Smaller Companies for mid and small-cap exposure.

"While we continue to rate Mercantile Investment Trust's management team highly and believe its size provides good liquidity, we believe that BlackRock Smaller Companies offers better value at present on its current discount of 16% (Mercantile investment trust's discount is at 13%)."

International equities

For exposure to international equities, Winterflood recommends British Empire Trust, Monks and Scottish Mortgage this year.

Elliott explains that British Empire Trust's current discount of 7% offers value, with downside risk being mitigated to an extent by the board's active buyback programme.

He believes that Monks has a well-resourced management team and impressive long-term track record.

"With a market capitalisation of £1.2 billion, it also offers good liquidity in the secondary market, and its competitive fee structure means that ongoing charges are low at only 0.59%."

Commenting on Scottish Mortgage, Elliott says: "The managers' growth-focused investment approach is well established.

"However, there will be times when their views are at odds with the market and this could result in volatile performance, exacerbated by the fund's gearing, which is currently equivalent to 11% of net assets.

"While performance over the last year has been quieter, we are confident that Scottish Mortgage is well placed to outperform over the long term and in benign market conditions."

ATR's 5% discount is tighter than peers but it has the potential to trade at a premiumFor Europe, the broker has selected Fidelity European Values, which now trades at a 13% discount to NAV, wider than the sector average of 10%.

Another pick is Henderson European Focus. Winterflood notes that its managers make good use of gearing when investing in the mid and small-cap part of the market.

For US exposure Winterflood suggests North American Income because "it offers attractive exposure to US equities combined with a yield of 2.8%".

Asia Pacific and emerging markets enjoyed strong returns last year, yet discounts remain wide. For Asian exposure this year, Winterflood has opted for Schroder Asian Total Return.

Although the fund's discount of 5% is tighter than that of the majority of its peers, the broker says, "there is potential for the fund to trade on a premium so it therefore offers value".

Another recommendation is Aberdeen Asian Income. The trust has a strong long-term record, returning 195% over the last 10 years.

But more recently its performance has been disappointing, and it now trades on a 7% discount, which offers an opportunity according to Winterflood.

In addition, it finds the yield of 4.2% attractive, and also likes the fact that the fund has increased its dividend every year since launch, with the exception of 2008 when it was maintained.

 This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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.