Analysts name suggestions for growth-oriented trusts that focus on assets other than listed equities.
As equity markets worldwide get the jitters over inflationary pressures and political unrest, many investors are casting about for safer havens for at least some of their portfolio.
Growth investors who were concentrating on the seemingly unending upward trajectory of technology stocks have been particularly hard hit in the first month of 2022, as markets have reacted to the prospect of imminent interest rate rises from the Federal Reserve.
So it is useful the investment trust analyst team at Peel Hunt has pulled together some suggestions for growth-oriented investment trusts (defined as having yields of less than 3%) that focus on assets other than listed equities. It’s an interesting challenge, given that many of the most obvious alternative choices – real estate, infrastructure, renewable energy, even commodities – produce generous income payouts.
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Peel Hunt’s analysts looked at the yields of the various types of alternative investment trusts, and found that those paying out less than 3% were largely invested in private equity, so they selected four contrasting private equity trusts.
HgCapital Trust (LSE:HGT) has had a fantastic record in backing unlisted tech companies, with five-year annualised net asset value total returns of 24%. It’s been trading on a premium since mid-2019 and currently remains on a small premium, but Peel Hunt suggests that volatility in the tech sector could be a good buying opportunity.
In contrast NB Private Equity Partners (LSE:NBPE), on a 21.4% discount (as of close of trading 31 January), focuses on mega trends and long-term secular growth. It does have some listed holdings, but over 90% is in unlisted. It also pays a 3% dividend. “Given the mix of investments, the maturity profile of the portfolio and the dividend, we see both net asset value (NAV) appreciation and discount narrowing from here,” it says.
HarbourVest Global Private Equity (LSE:HVPE), unlike the first two, is a fund of private equity funds so it’s much more diversified, with exposure to more than 10,000 underlying companies. It has managed a yearly NAV total return of 19% over the past five years, and yet it’s on a 19.7% discount.
Peel Hunt’s fourth pick is Augmentum Fintech (LSE:AUGM). The trust is a specialist in disruptive financial services enterprises. It focuses on businesses that “offer the prospect of high growth with scalable opportunities” – indeed, its largest holding is interactive investor at 16% of NAV. Peel Hunts predicts “multiple potential near-term NAV drivers from portfolio holding exits and realisations”. The trust is currently trading on a discount of 3.9%.
The firm also picked out three longstanding wealth preservation favourites from the Flexible sector: Ruffer (LSE:RICA), Capital Gearing (LSE:CGT) and RIT Capital Partners (LSE:RCP). All hold a diverse mix of assets, including index-linked government bonds, gold and listed equities, although their strategies differ.
For example, Ruffer (on a 3.3% premium) has been actively hedging against the risk of rising interest rates and focusing on value-oriented equities. Capital Gearing (also on a 3.3% premium) uses no short selling or gearing, but has protected against inflation through alternatives and property, which often have inherent inflation linkage. RIT uses funds, private equity, absolute return and currencies to protect against downside and deliver on the upside; it’s trading on a 8.4% discount and Peel Hunt “sees value at these levels”.
Other investment trust commentators also have their eye on alternative options for growth in the coming year.
Shavar Halberstadt, an investment trust analyst at Winterflood has opted, like the Peel Hunt analysts, for private equity trusts – in this case ICG Enterprise Trust (LSE:ICGT) and Standard Life Private Equity (LSE:SLPE).
ICG Enterprise has 12 consecutive years of double-digit portfolio growth on a local currency basis, and Halberstadt sees that trend as set to continue, making the current 18.7% discount “hard to justify”.
He adds: “We regard ICG Enterprise as a ‘have your cake and eat it’ private equity play. It provides diversification of underlying companies in its portfolio, but is concentrated at the top end, reflecting its strongest convictions.”
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Standard Life Private Equity aims to back ‘best in class’ managers of private equity firms, both in Europe and in the US. Again, it’s on a double-digit discount (-16.6%) despite the “strong long-term growth prospects of the portfolio”.
Growth in demand for certain commodities, accessed through largely unlisted holdings in pre-IPO mining stocks, is the territory of Baker Steel Resources (LSE:BSRT) chosen by Andrew McHattie, the publisher of the Investment Trust Newsletter.
“The managers say several of their projects are nearing maturity, which could spark revaluations and exits, backed by a supportive environment for market pricing,” he says.
The trust’s 20% plus exposure to gold also provides something of a hedge in nervous markets and could benefit if inflation persists.
Although the share price has been weak for the past nine months, the trust is on a 24.7% discount and “provides some comfort while holders wait for it to pick up again”.
Finally, McHattie also looks to fintech, this time in the shape of Chrysalis Investments (LSE:CHRY), a provider of growth capital for fledgling fintech businesses and late-stage private companies “with big potential”. It was hammered in the growth sell-off of the past weeks, but McHattie sees the 22.2% discount as a great entry point given its strong track record. Even after the rout of the past month, the share price is up 90.3% over three years.
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