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Each week we ask an expert for tips on how to invest £10,000. This is the third in our series focusing on investment trusts. They are like other funds managed by professionals but are structured as companies. This means investors can trade them on the stock market just as they would any other company, such as Vodafone or Lloyds Banking Group.
The share price for the trust can be higher or lower than the underlying value of its portfolio of stocks, which is known as being at a premium or a discount to net asset value. When at a discount, this is an opportunity to access the shares of the companies the trust invests in more cheaply than buying them directly.
Trusts also have the ability to leverage up — that is, to borrow money to finance new investments — though this obviously comes with risks.
This week, Tom Becket of Psigma Investment Management, which manages £2.6bn of funds, explains why they are useful for small investors.
Becket, 38, lives in Tunbridge Wells, Kent, with his wife Lisa and their children, Betsy, 5, Freddy, 2, and James, three months. He said: “Investment trusts are the elder statesmen of the investment world and some have been around for almost 150 years [the first was launched in 1868 by Foreign & Colonial].
“They allow smaller investors to trade in a diverse range of assets without being tied in. Because they are shares, you can simply sell your holdings if you want to cash in the investment. If you invested in an asset directly — say a commercial property — you might struggle to do so quickly.
“Investment trusts form what I call an alternative or uncorrelated part of my wider investment portfolio. My four picks should therefore be considered as part of a broader, more diversified investment portfolio. I would divide my £10,000 equally between them.”
Here Becket explains his choices.
Woodford Patient Capital Trust(down 9.9% over a year) This trust focuses on technology and healthcare companies that develop research coming out of top British universities, and includes unquoted companies.
Its main holdings include Prothena and Oxford Nanopore, biotechnology firms that are involved in research and development. I’m a big believer that this sort of company will drive the growth in markets over the coming years and decades.
Woodford Patient Capital did not perform particularly well last year, partly because of a fear that Hillary Clinton would win the American election and introduce regulations that would have a negative impact on the healthcare sector. However, this means the share price is relatively low. I added to my holdings in the trust following Donald Trump’s victory in November.
Throw into the mix that the trust is run by a star fund manager, Neil Woodford, and I can start to get very excited about its long-term growth.
The annual charge is 0.18%. A performance fee may also apply. These charges are on top of what you pay the platform or broker used to buy the trust, which is always the case with investment trusts.
TwentyFour Income fund(down 0.6%)
This trust invests in bonds, which are debt issued by companies. It has a 6% yield with a good possibility for capital growth. Like the Woodford trust, it gives access to assets I would otherwise struggle to invest in. In this case, it is European asset-backed securities. These are debts secured against assets, rather like a mortgage.
European asset-backed securities are some of the most attractive investments at the moment because they are hugely undervalued.
I struggle to think of better managers in this field than the outstanding team at TwentyFour. The annual ongoing charge is 0.98%.
P2P Global Investments (down 18.3%)
One of the financial developments most often discussed over the past few years has been the advent of peer-to-peer (P2P) lending. This cuts out the middleman between those who want to lend and those who want to borrow.
There has been some recent negativity about the concept, but I have a more positive long-term view. P2P lending is the best example of financial services moving away from traditional banks. It could be highly disruptive — in a positive way — in the years ahead.
This trust, managed by MW Eaglewood Europe, allows you to get involved without taking on as much risk as you would if you lent your money directly to a person or company on a P2P platform. The managers of the trust do it for you. They have a rigorous process for selecting which loans to make, and accept only the most creditworthy borrowers in America and Britain.
There is obviously a risk involved but default rates are encouragingly small and, in my view, the high income return provides enough compensation.
The unjustified scepticism towards the sector is reflected in the 20% discount to net asset value. This should ensure decent capital appreciation and a healthy yield for patient investors.
The annual charge is 1%.
NB Distressed Debt Investment fund(up 27%) This would be the highest-risk component of my investment trust portfolio. The managers buy into assets put up for sale by companies because they need to raise funds quickly.
Managed by Michael Holmberg and his team, the trust was launched to take advantage of cash-strapped banks forced to sell problematic investments from their balance sheets. Opportunities in the European banking sector look ripe for the picking.
The manager’s primary task is to work out whether the “distress” in the asset’s price is justified or whether there is the potential to acquire the asset cheaply and help it recover.