Eight trusts and funds for ISA season

Now in the throes of ISA season, people will be considering their investment choices and reviewing what’s in their portfolios before the start of the new financial year. Alena Kosava, head of investment research at AJ Bell, looks at eight funds and investment trusts with different risk levels covering bonds, global equities, infrastructure, healthcare and dividends.

Cautious investors:

Personal Assets Trust

The £1.9 billion Personal Assets Trust is a solid choice for investors looking to protect and increase (in that order) the value of their investment over the long term. The trust has generated steady returns over previous years and tends to do particularly well amid challenging market conditions and souring economic sentiment – conditions experienced throughout 2022 and expected to continue into 2023 – which the trust’s experienced manager Sebastian Lyon had been concerned about for a long time. With a heavy sell-off across equity markets and material repricing across the bond universe, underpinned by fears over the potential for persistently high inflation for a considerable period going forward, the defensive positioning of this trust, and in particular its exposure to inflation protecting assets such as gold and inflation-linked bonds, means it has notable appeal. The portfolio is relatively unchanged from a year ago with around 10% in gold bullion and 35% in US TIPS (US index linked bonds) supporting the core exposure to high quality equities such as Unilever, Visa and Nestlé. Amid bear market falls in both equities and bonds throughout 2022, the trust offered significant protection to client capital (down -3.8% on the year). As a result, the trust can be effective at providing investors with a multi-asset diversified portfolio and given the emphasis on capital protection, could sit well with more cautious investors.

Royal London Investment Grade Short Dated Credit

Having seen a wholesale repricing in fixed income markets in 2022, bonds are finally offering reasonable levels of income. While high inflation remains a feature of markets, we are starting to see disinflation come through. Interest rates are still expected to increase, but likely at slightly a slower pace. With the backdrop for bonds turning more positive, investors should consider exposure to this area of the market as part of a diversified portfolio. Keeping duration short can dampen volatility in times of market dislocations amid rising bond yields as well as offer capital protection. The fund’s investment objective is to achieve a total return over the medium term (3–5 years) by investing at least 80% in investment-grade bonds. Of these, at least 70% will be short-dated (bonds that will reach maturity within five years).

Prior to investment, the fund’s holdings are subject to predefined ethical criteria. Manager Paola Binns aims to outperform, after the deduction of charges, the ICE Bank of America 1-5 Year Sterling Non-Gilt Index by 0.25% over rolling 3-year periods. The index focuses on shorter dated maturities relative to the broader market and is regarded as a good measure of the performance of short-dated sterling-denominated bonds, not including those issued by the UK government (gilts). As base rates rose and pushed bond yields higher, the performance of long duration assets faced challenges throughout 2022. The fund’s shorter duration stance held it in good stead, with the strategy offering protection in a falling market compared to the IA £ Corporate Bond sector. The fund is well-ahead of the IA sector over the medium and longer term, and has outperformed the shorter-dated ICE benchmark. This outperformance over time has been achieved with broadly half of the volatility of the IA sector peers. As yields have risen, the fund is now yielding c.3.3% and has a duration of c.2.9 years, slightly above its index benchmark, which stands at 2.8 years. The portfolio is well diversified holding some 280 bonds.

Balanced investors:

Fidelity European Trust

This £1.3 billion trust aims to achieve long-term growth in both capital and income by predominantly investing in equities of continental European companies. The strategy is focused on identifying long-term growth opportunities in companies with strong fundamentals as well as long-term structural growth prospects. Manager Sam Morse has three decades of experience having worked at Fidelity for 18 years and looks for businesses exhibiting an ability to grow dividends sustainably over a 3-5 year period. He co-manages the strategy with Marcel Stötzel, who was appointed in September 2020.

The portfolio is comprised of quality companies trading at reasonable valuations, best thought of as a GARP investment style. The manager also runs an open-ended strategy – Fidelity European Fund – implementing the same philosophy and approach to selecting European stocks. The process steers clear of trying to time markets and typically avoids more cyclical stocks and smaller companies in order to manage downside risk. The managers are supported by a breadth of resources at Fidelity, with a group of dedicated European analysts as well as a well-established team of ESG research specialists. With the manager being well-resourced and seasoned cautious investors focusing on ensuring capital loss mitigation on the downside, clients are set to benefit from this approach amid continued market turbulence. Trading on a -7.4% discount at the time of writing, the trust has offered protection in falling markets through 2022, while also outperforming both the broader European equity market and sector. Returns are ahead over the longer term, with broadly similar levels of volatility. The trust carries an overweight to financials, technology and industrials sectors, featuring some of the household names at the top of its portfolio, including Nestlé, ASML and LVMH Moet Hennessy. Its current level of gearing is c.8%, whilst the trust is offering a c.2.1% yield to investors.

First Sentier Global Listed Infrastructure fund

As the prospect of recession is staring investors in the face, the importance of portfolio diversifiers in the form of real assets such as high-quality infrastructure has been clearly illustrated. Whether it is through energy needs, distribution networks or communication services, infrastructure is a key part of a fully functioning economy. Due to the ongoing war in Ukraine, the importance of energy security and independent infrastructure assets also came to the fore. The First Sentier Global Listed Infrastructure fund looks to provide exposure to all of these areas and more in a global portfolio of infrastructure companies. With over 40% invested in energy related companies, it provides exposure to many who are leading on energy transformation while also giving exposure to critical distribution infrastructure such as railroads and toll roads. The portfolio is biased towards the US sector (c.56% exposure) and has material exposure to electric utilities (30%), highways and rail tracks (17%), and multi-utilities (12%). It is currently yielding 2.5%. The fund benefits from the experienced team at First Sentier based in Australia, who have been at the forefront of infrastructure investing for many years. The fund was ahead of the IA Infrastructure sector and longer term performance is broadly in line with the peer group.

Adventurous investors:

Worldwide Healthcare Trust

Having emerged from the covid-19 pandemic and now facing a prospect of a global recession, a healthcare selection might seem like an obvious choice, but the £2 billion Worldwide Healthcare Trust had a tough 2020 and has languished so far in 2022 for a number of reasons. With an underweight to the big covid pharma stocks and an overweight to life sciences, biotech and China, this trust has faced some strong headwinds and underperformed its benchmark by 20%. Challenges around Chinese exposure persisted in the last couple of years.

However, the bigger picture away from the immediate covid winners’ story is how the rapid drug development of the last 18 months translates into revolutionary new treatments looking forwards. In a recent update, managers talked about biotech being in a ‘sweet spot’ and the place to be in a recession. Despite a widening discount (-8.3% at the time of writing), the managers are bullish about the healthcare sector given its track record of delivering revenue growth and share price outperformance during recessionary periods. The trust’s managers, healthcare specialists OrbiMed, continue to find attractive opportunities and the recent issues in China have created further buying opportunities. In addition, the trust has access to private markets and has been looking to invest in the unlisted space with c.6% of the trust’s exposure in this area. With the long-term drivers behind healthcare well established and further investment set to contribute towards further drug development, this broad, diversified play on healthcare looks attractive after a period of significant underperformance. Lastly, the high levels of mergers and acquisitions over the prior quarter are a key signal that the sector is reviving after a difficult start to the year, offering an opportunity to profit from companies being acquired (typically at significant premiums). The trust carries c.3% gearing at the time of writing, yielding c.0.8%.

Fidelity China Special Situations Trust

Chinese equities had a torrid time in the last couple of years. Sentiment towards China has turned in recent years, driven by concerns over the property sector and the continuation of the zero-covid policy. Capital allocation saw investors tilting portfolios away with the capital fleeing the market. In what was a material surprise to the global investor community, China delivered an unexpectedly rapid turnaround in their zero-covid policy approach, allowing an earlier-than expected border re-opening plan. While the road ahead is likely to remain bumpy, the re-opening marks a fundamental shift and an improvement in investor sentiment towards Chinese equities. As China is set to become the world’s largest economy within the next decade, exposure to its expanding middle class, rising median incomes and technological advancements should underpin the region’s growth prospects.

Fidelity China Special Situations Trust offers exposure broad exposure to the opportunity China offers through this one portfolio. Long-standing manager Dale Nicholls focuses on providing exposure to companies benefitting from China’s consumption growth opportunity. New consumer spending power and increasing aspirations underpin many of the portfolio’s investments, alongside fast-growing industries such as the internet, e-commerce and healthcare. The trust invests across an array of sectors, utilising Fidelity’s ample analyst resource. At the sector level, consumer discretionary, communication services and industrials are some of the largest exposures for the trust. The vehicle also offers exposure to A-shares and unlisted companies, sought to capitalise on emerging opportunities and trends within the domestic market as well as progress achieved by businesses ahead of any potential public listings. Both are enabled by Fidelity’s locally based ‘feet on the ground’ analyst teams, offering deep research capabilities.

Income seekers:

City of London IT

For many investors who want income the UK is the obvious place given its traditionally higher yield, and City of London Trust is, perhaps unsurprisingly, one of the highest yielding trusts on our Trust Select List. Yielding c.4.8%, the £2 billion trust aims to provide long-term growth in income and capital, principally by investment in equities listed on the LSE. It has the longest track record of dividend increases of any investment trust for annual increases in dividends, since 1966. It has achieved this mainly by focusing on quality companies able to grow dividends over time. The board fully recognises the importance of dividend income to shareholders, with a relentless focus on consistency over time – the trust is able to hold back up to 15% of its income, beefing up revenue reserves for use in challenging times when company dividend income may be cut. The trust invests mainly in UK equities with a bias towards large, multinational businesses able to grow their profits consistently over the long run.

Manager Job Curtis has been running the trust since 1991 and has a valuation-driven conservative investment approach focusing on sustainable income and long-term capital growth. While invested mainly in UK stocks, the companies underpinning the portfolio enjoy overseas revenue streams making for a diverse global exposure. Overseas names include the likes of TotalEnergies, Nestlé and Novartis. Diversified across some 80 holdings, the manager focuses on delivering a level of capital protection in falling markets, as well as being able to capture benefits on the upside. One of the largest and most liquid trusts within the UK Income category, the trust is trading on a premium of c.2.2% at the time of writing. It has performed broadly in line with the market over time while also delivering attractive income. Some of the largest holdings are British American Tobacco, Shell and Diageo.  

JPM Emerging Markets Income

While emerging market equities have suffered material underperformance over the last few years, this has largely been driven by steep losses in China. Amid numerous challenges, including property sector rebalancing, common prosperity narrative, geopolitical risks around Taiwan and zero-covid lockdowns to name but a few, investors may (understandably) feel nervous. Having said that, China has unexpectedly changed course, emerging from its zero-covid policy. While western central banks continue to fight inflation in full force, emerging economies were swift to tighten policy and raise interest rates earlier, with many regions now in a position to start easing policy. A slowing pace of tightening by the Fed could mean a pullback in US dollar, which should also be supportive for emerging markets.

An equity income approach at the current juncture appears attractive, offering some cushioning in the form of regular dividends. Yielding c.4.0%, the fund aims to provide a portfolio designed to achieve income while participating in capital growth over the long-term (5-10 years). This is a credible EM income strategy with a breadth of analytical support combined with a dedicated portfolio management team focusing on the income consideration. Diversified across c.90 names, the fund offers sufficient compositional breadth, while ensuring diversity of drivers underpinning its dividend. The fund is closely aligned with the closed-ended JPMorgan Global Emerging Markets Income Investment Trust listed on the LSE, with the strategy launched one year before this fund in July 2010. The trust is yielding c.3.8% and can carry up to 20% gearing, although it currently has 7.5% based on January 2023 figures. Both carry a slight underweight to China, with exposures of c.28% across both vehicles. Mexico, Hong Kong and South Africa are among the largest overweights, with India the largest underweight relative to the broader market. JPM Emerging Markets Income fund is also currently on the AJ Bell Favourite funds list.

These articles are for information purposes only and are not a personal recommendation.

We don’t offer advice, so it’s important you understand the risks, if you’re unsure please consult a suitably qualified financial adviser. The value of your investments can go down as well as up and you may get back less than you originally invested.