Ian Cowie: the racy investment trust sector with eye-popping returns

How do you fancy eye-popping total returns of 146% over the last five years, following an even more remarkable 511% over the decade, from shares which are currently unloved and priced at double-digit discounts to net asset value (NAV) after a loss of 7.3% over the last year?

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Let me say straight away this one is not for widows and orphans or - apparently - members of company pension schemes.

Risk-averse investors of all descriptions should look away now because I am talking about “private equity” or businesses whose shares are not traded on any stock market. That defining characteristic raises obvious problems about valuation and how to get back into cash.

But the numbers above, which are the average returns from 15 funds in the Association of Investment Companies (AIC) “private equity” sector, show how medium- to long-term shareholders have been rewarded for accepting these risks.

Better still, closed-end funds such as investment trusts are the ideal way to gain exposure to these assets, because they avoid the problem that open-ended funds such as unit trusts can be forced to sell during short-term setbacks.

To be fair, all forms of pooled fund enable individual investors to diminish risk by diversification and share the cost of professional fund management.

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But it is remarkable that the government’s latest proposal to encourage pension funds to gain more exposure to private equity’s medium- to long-term capital growth seems to exclude investment trusts, which manage more than £100 billion of these assets.

Mystifying would be another word for it. At times, it is almost as if our political leaders - from all parties - haven’t got a clue what they are doing.

That’s not encouraging when they start to interfere with millions of other people’s life savings.

It’s even less encouraging when they ignore repeated invitations - from here and elsewhere - to lead by example and invest more of their Parliamentary pension scheme in UK shares, including private equity, which comprised less than 4% of that fund the last time I looked.

Assessing the market leaders

Never mind the political knockabout because you can get plenty of that elsewhere. More positively, the giant 3i Group Ord (LSE:III) is the long- and medium-term leader with sector-topping returns of 840% over the last decade, followed by 201% over five years, before losses of 13% over the last year.

That last disappointment might explain why shares in this fund with assets of £29.4 billion currently trade at 6.8% above NAV, still a premium but much lower than a year earlier.

This might present risk-takers with an opportunity to buy into a cut-price bargain, which would be appropriate as £17.8 billion of III is invested in the cut-price Continental retailer, Action.

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While that is a big bet on a single chain of shops, III can point to decent dividend income of 2.4% which has risen by an annual average of 15.8% over the last five years. Ongoing charges are modest at 0.59%.

Investors who seek more diversified exposure might prefer the short-term leader among large funds in this sector, ICG Enterprise Trust Ord (LSE:ICGT).

With assets of £1.4 billion and returns of 259%, 85% and 22% over the last decade, five years and one-year periods, the shares are priced 25% below NAV.

Looking under the bonnet, ICGT’s top 10 assets include Froneri, the unlisted ice cream-maker that is the largest rival to The Magnum Ice Cream Co NV (LSE:MICC), recently spun off from Unilever (LSE:ULVR); ATG Entertainment, formerly Ambassador Theatre Group, which owns 10 West End venues; and David Lloyd Leisure, the biggest health clubs group in Europe.

Interestingly, ICGT recently got a vote of confidence from Amundi, the largest fund manager in Europe, which bought 9.9% of the investment trust’s shares in November. Dividend income of nearly 2.5% is rising by 9.4% per annum and the ongoing charge is 1.38%.

Other notable private equity investment trusts include HgCapital Trust Ord (LSE:HGT), where the top underlying holding is the European software company Visma, and returns over the usual three periods were 486% (placing it second in its sector), followed by 75% and a marginal loss of minus 0.1%. HGT yields around 1%, rising by 2.8% per annum over a five-year stretch and is priced at an 8% discount to NAV.

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Columbia Threadneedle’s CT Private Equity Trust Ord (LSE:CTPE), whose top holdings include the clothing company, Weird fish, came second over five years and third among large funds over the last year with total returns of 292%, 136% and 24% over the usual three periods. CTPE yields 5% income, rising by 12.8% per annum over five years, and trades roughly 18% below NAV.

It is worth repeatedly emphasising the risks inherent in businesses whose shares are not traded on any stock market. But the returns above show that the rewards can also be substantial.

Quite why the government does not seem to want company pensions to access private equity by the safest form of pooled fund remains a mystery.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.