Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
A world of opportunity with investment trusts
Investing in a single country fund typically involves a higher degree of risk than a more diversified alternative but it has the potential to deliver some spectacular returns.
Single country investment trusts are available for the main developed markets such as the US and Japan, as well as more specialist areas like Russia, India, Qatar, Vietnam, China, and Brazil.
Emma Bird, a research analyst at Winterflood Investment Trusts, says that single country funds exhibit a higher level of risk than global or regional funds, as investors are exposed to falls in the domestic stock market impacting the net asset value (NAV) and negative sentiment towards the country leading to widening discounts.
‘However, we believe that for certain countries they can be justified if they represent a significant weight in world indices, such as the US, or exhibit relatively unique characteristics and therefore benefit from specialist management, such as Japan or China.’
Winterflood is currently recommending the North American Income Trust (NAIT), which has been managed by Fran Radano and Ralph Bassett of Aberdeen Asset Management since June 2015.
‘The fund has performed well since the appointment of the current co-managers, outperforming, in NAV terms, both of its benchmark indices, the S&P 500 and Russell 1000 Value. In our opinion the current discount of 9% offers reasonable value and we believe that the fund offers attractive exposure to US equities, combined with an above-market yield of 2.7%.’
Alan Brierley, director of the investment companies team at Canaccord Genuity, recommends JPMorgan Japanese (JFJ) which has a market value of £556m and trades on a 12.7% discount
‘Nicholas Weindling became lead portfolio manager in July 2010 and since then he has constructed an impressive performance record with JFJ ranked sixth out of 64 open and closed end funds in the sector. Over this period, the fund has returned an annualised NAV total return of 12.6% against the TOPIX return of 9.5%.’
Weindling invests in undervalued, good quality growth companies and pays little heed to the benchmark. He thinks that Japan’s continued progress on corporate governance in terms of improved capital management and shareholder returns is slowly gathering momentum and that it is the sustainability of these improvements that can drive valuations higher.
The choice of country is obviously the main consideration when buying a single country fund, but it is also important to consider the experience of the fund manager and the investment strategy.
Ewan Lovett-Turner, director of investment companies research at Numis, says investors should be aware of any potential governance issues, such as voting rights and the independence of the board, as well as the nature of the shareholder base and whether discount control mechanisms are in place that could protect them if sentiment towards the country deteriorates.
‘I believe the multi-asset approach of VinaCapital Vietnam Opportunity Fund (VOF) is an attractive way to gain exposure to the domestic growth story in Vietnam. It benefits from a well-resourced, locally-based management team headed by Andy Ho, and I see scope for a significant narrowing of the fund’s discount to NAV, currently 22%, which is supported by an active buyback policy.’
VOF’s portfolio has significantly outperformed the Vietnam Index in recent years, with the managers seeking to increase exposure to private equity, having achieved several profitable exits. They are also looking to reduce the weighting in real estate, an area that has proved a headwind for performance.
Ben Conway, senior fund manager at Hawksmoor Fund Managers, likes India Capital Growth Fund (IGC) and first bought into it in August 2016.
‘We are not afraid of buying smaller investment trusts − this one has a market cap of less than £100m − if we think we will be long-term holders, if we like the manager and the asset class, and if there is the potential for the discount to narrow. The shares remain cheap at around a 21% discount.’
IGC is also the largest holding in Miton Global Opportunities (MIGO), as its manager, Nick Greenwood, thinks that the benefits of Narendra Modi’s market friendly government should feed through into improved earnings forecasts over the coming years.
Matthew Read, a senior analyst at QuotedData, says a key differentiator between funds is where the investment team is based; either locally on the ground or at home in the UK.
‘We think that constant access to company management is not crucial, but having sufficient access is, and so we like to see managers meeting investee companies around once a year and having regular dialogue generally.’
If you want exposure to Russia you might want to consider JPMorgan Russian Securities (JRS), which is run by one of the most experienced investment managers in the sector, Oleg Biryulyov.
‘Oleg has been managing Russian equity funds for 23 years and JRS since its launch in 2002. Alongside his own local expertise, he has the support of both JPMorgan Asset Management’s global team, who produce a macro outlook for each country and region, and its research team, where over 40 individuals are involved in research on EMEA stocks,’ explains Read.
The Russian market has had a difficult couple of years, but has been improving on the back of the strengthening oil price. (NS)