How two investment trust analysts are investing this tax year

ISA or pension? Two Kepler Trust Intelligence experts consider whether to opt for more adventurous investment trusts, or take a cautious approach.

‘I’m focusing on the long term and adding to my pension’ 

Your analyst wishes he had cause to celebrate after Jeremy Hunt abolished the lifetime pension limit. Sadly, it will be many years before I breach the £1 million former threshold. However, a pension is definitely my preferred destination for the savings I have to invest this tax year, and I’m at least going to make a go at that target. The tax breaks are a good reason to invest in a pension, rather than an ISA. Another is the long time frame it opens up. In my view, it is easier to stick to a long-term discipline with funds in a pension, as they are stuck there for, in my case, probably three decades.

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While I am as guilty of watching the headlines as anyone, in recent years I have been able to prevent myself selling some investment trusts I hold in my pension, which I believe will generate excellent returns over the course of full market cycles. These are small and mid-cap focused trusts, with a cyclical and/or value tilt and a willingness to make generous use of gearing, which I think can deliver great long-term returns albeit with potentially alarming volatility along the way. Personally, I am more bearish than most on the immediate outlook, but even though I think these trusts may continue to have a tough time for a while (and they have made losses in recent year) the managers’ consistent approach to their strategies makes me confident they will do much better than the market when the mood changes and will more than make back any absolute and relative losses.

Having some cash to put away before the tax year ends, there are a few trusts I am eyeing up which I think have similarly risky profiles but great long-term prospects. One of these is Vietnam Enterprise (LSE:VEIL). Vietnam has increasingly become of interest to emerging market managers in recent years. There are a number of structural drivers behind its economic growth: cheaper labour than China, growing infrastructure investment, good demographics and a less volatile political relationship with the West than its larger northern neighbour. Multiple economic forecasters think it will achieve some of the highest economic growth in the world over the next few years, including Kepler’s own emerging markets fund manager, Ed Butchart. The Vietnamese market saw sharp losses in 2022, with an anti-corruption drive and questionable regulatory changes to bond market rules knocking confidence. This is a good reminder of the sort of volatility that can come with investing in frontier markets. However, I think Vietnamese equities could do very well over the long term, if investors can hold through the noise.

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India is another country which I think has a bright future. It is more developed than Vietnam and has a more established legal and corporate governance culture – although it is not without its flaws as the controversy surrounding the Adani Group has highlighted. However, the basic story is similar: India is rapidly developing and has helpful demographics which should support economic growth. India is further along the developmental path in many ways, and already has globally significant players in certain industries, in particular IT outsourcing. The authorities are attempting to create a tech cluster which could see more advanced manufacturing and design operations take place in the country in the fullness of time, as well as rolling out bank accounts and online services to the huge and growing population. The bugbear with India is valuations – but it always has been. India tends to be more expensive than other emerging markets, although the gap has grown over the last couple of years as valuations have fallen on other major emerging economies. Could India follow in the short term? It surely could, I can’t predict whether it will. So there are near term risks, especially as India is more of a growth market by composition and sensitivity (India being a net energy importer). However, for the long term, I think it could be an excellent place to invest, and Ashoka India Equity (LSE:AIE)’s excellent track record since launch and large devoted India-based analyst team make it an intriguing choice for exposure. At the time of writing it is on a small discount too, which has been rare.

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Another secular growth theme which I think has a long runway of growth ahead of it is greenery, more specifically the shift away from fossil fuels to renewables (and perhaps nuclear) and the increasing focus on energy efficiency to reduce emissions. Like many growth themes, losses have been made playing this strategy in recent years. Maybe valuations got ahead of themselves, but the direction of policy and society is clear. Impax Environmental Markets (LSE:IEM)is now available on a small discount, having been on a significant premium not so long ago. It has diversified exposure to various sustainable themes, from new energy to clean transportation to water efficiency. It’s another one that could be interesting on a multi-decade view, albeit with the potential for volatility as recent years have illustrated.

Nicholas Todd is an investment trust research analyst at Kepler Trust Intelligence.

‘I’m staying flexible with an ISA’ 

Picking long-term winners is tough. Really tough. A recent illustration is the fate of investors in the Ark Innovation ETF (ARKK), managed by Cathie Wood. The fund soared in 2020 as money poured into tech industries and interest rates were slashed. It then plummeted during 2021 and 2022 as the air came out of what appears to have been a bubble. The ETF is still up since launch – in fact, it has almost doubled investors’ money since inception in October 2014. However, according to the FT (on 08/03/2023) the dollar-weighted return is circa 27%, meaning that the average dollar invested in the fund over its lifetime is down over a quarter in value. This is because most of the money was invested on the back of a period of strong performance and before the fund cratered over 75% peak-to-trough. Cathie Wood’s philosophy makes a lot of sense: focus on the long-term opportunity and ignore the short-term noise. It’s easier said than done though: are Tesla Inc (NASDAQ:TSLA) and Teladoc Health Inc (NYSE:TDOC) long-term winners or fool’s gold?

In my view, the problem with high-risk investments is the simple fact it is very hard to see the future, and even harder to see the far future. Back to the Future II (1989) featured a news drone recording a criminal’s arrest, which seemed far-fetched at the time. These days it is common to see drones in our cities, and even wheeled delivery drones in some UK towns. On the other hand, the hoverboards featured in the same film seem just as far away now as they did then. A more mundane example is the failure of many emerging market countries to escape the ‘middle income trap’ over the years; it isn’t written in stone that countries have to approach the economic and social state we see in the West. In fact, in the last decade, we have even seen a European Union country relegated from developing to emerging market status, i.e. Greece.

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The current market environment is highly uncertain, with multiple sources of volatility. Underlying it all, as the chief cause of mischief, is the swift change in interest rate regime and uncertainty around how it will develop. In my view, it makes much more sense to focus on a more modest time horizon and this is the approach I am looking to take this tax year. Rather than trying to lock myself into some long-term multi-baggers, I am thinking about looking for investments where there is value on a shorter-term view. The beauty of investment trusts is that there are many excellent managers working on diversified portfolios, which should moderate more specific risks. In keeping with my more limited time horizon, I prefer the flexibility of an ISA – who would dare to assume pension pots won’t be raided in future by an impecunious government?

UK mid-caps are a great growth market. Over the years, they rival the S&P 500 for generating returns, albeit from much smaller companies. In my view, current discounts of trusts investing in the market are attractive. A good example is JPMorgan Mid Cap (LSE:JMF). This has suffered in the growth sell-off and trades at a discount of almost 13%, at the time of writing. However, the process is about much more than the growth factor. The managers, Georgina Brittain and Katen Patel, look for multiple return drivers, including free-cash flow yields, i.e. valuation, and momentum. The result is a potentially highly flexible portfolio with a good track record of outperforming in bull markets. UK small and mid-caps are still cheap, as is the trust, and I think that over a three-to-five-year view, we will pull out of this slump and these discounts could close. In my view, it is an interesting option for those looking to take some risk, but who wish to remain diversified and nimble.

On a similar theme, I think Edinburgh Investment (LSE:EDIN) looks like an interesting investment on a three-to-five-year view. The trust has outperformed the FTSE All-Share Index under managers James de Uphaugh and Chris Field, who took over almost exactly three years ago. Their strategy is flexible, with a concern to find undervalued revenues, wherever they are in the market. In my view, the next few years will see less sheer divergence between growth and value styles, and having a flexible approach to sector and industry could prove advantageous.

Thomas McMahon is investment trust research manager at Kepler Trust Intelligence.