At the turn of the tax year, Keiron Root seeks suggestions for investment company shares to put into an ISA.

Whether you are still looking for a home for your 2008/09 ISA allowance or are already mapping out your strategy for the new tax year, the dramatic falls in the stock market over recent months mean that, if the usual laws of investment are still operating, there should be some attractive value opportunities appearing in the investment company sector.

It does, of course, take a leap of faith to believe that normal service will be resumed at some point, and we are aware that aspects of the financial markets will have to be different in the future. But every market creates opportunities and there is no reason to expect this one to be any different.

Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), feels that ‘With most sectors affected by the global economic crisis, the importance of taking a long-term approach to investment and having a balanced portfolio has become all the more apparent. While volatile markets can create buying opportunities, especially in the investment company sector due to widening discounts, it is important to do your homework and take a long-term view.’

Solid foundations
In particular, this means that those investors who can put money into their ISAs now could be looking at very substantial tax-free gains in a few years’ time, provided they have made the right investment decisions. So which investment company shares should they be looking at? As a core holding, Tim Cockerill, head of research at Rowan & Co Capital Management, likes the look of Perpetual Income & Growth Investment Trust.

He argues that ‘You can’t help but admire the performance of the Perpetual UK equity team, whose broadly negative outlook and resultant positioning has made them among the best performers. They are long-term investors with a focus on income generation, but in keeping with their other “income trusts”, the ultimate goal is about total return. If the stock market races ahead then this trust will be left behind, especially as it is trading at a small premium, but it works well as a core long-term holding. It is perhaps one of the few you can buy and forget about – almost.’

Christopher Sexton, investment director at Saunderson House, homes in on Fidelity Special Values as his core recommendation. He points out that ‘Under Anthony Bolton, this trust used to trade at a premium. We think the shares have been oversold and expect the discount of around ten per cent to narrow as current manager Sanjeev Shah makes his mark.’

He adds, ‘We have been following Shah closely since his days managing Fidelity’s UK Aggressive fund. He is backed by Fidelity’s strong research resource and he also looks into metrics such as directors’ deals or the amount of a company’s equity that is on loan to short sellers. He has the freedom to go short on markets and, by doing so, banked some profits at the start of 2008.’

Taking a flyer
By contrast, Mark Dampier, head of research at Hargreaves Lansdown, feels that no equity investment vehicle could be described as ‘cautious’ in the current market conditions, emphasising the fact that all stock market investors have to be prepared to take some risk on board. However, for those willing to do just that, he suggests looking at trusts in out-of-favour sectors, such as Japan and private equity.

He admits that ‘I am sure plenty of people will be sending the men in white coats to pick me up, but I would recommend Melchior Japan Investment Trust. Now, the performance of the fund hasn’t been great since its launch in 2006, in either absolute or relative terms. However, since the review and change of investment policy in 2008, performance has begun to improve. Top ten holdings count for 47 per cent of the portfolio, which means it is sharply focused with major sector weightings in technology and consumer discretionary. Certainly, this is one for the brave, but on a 30 per cent discount if the trust was wound up there is money to be made.’

Dampier’s private equity play is Electra: ‘The underlying portfolio is lowly leveraged,
it has cash and, in addition, its commitments to future funding are fairly low. In fact, the company has £18 million in cash with a current market cap of £269 million.

‘The current discount is a whopping 58 per cent. Even if you think the NAV might be overstated there is plenty of latitude in this discount for that. The present price is around £7.40, whereas the right price is possibly somewhere nearer £12. Of course, a large discount doesn’t mean that you will get a quick payback – discounts can stay large for quite some time. However, I do feel that you are buying value at these levels.’

Looking for value
Christopher Sexton also suggests an investment company from a currently out-of-favour sector. He recommends F&C Commercial Property Trust, drawing attention to the company’s ‘strong yield, healthy balance sheet and sizeable discount to net asset value.’

He adds, ‘Although we don’t think the downturn in the commercial property market
is over yet, with F&C Commercial Property Trust’s net asset value already down 40 per cent from its peak in mid-2007 and the trust trading at a discount to net assets of around 25 per cent, a lot of bad news is already factored into the share price. Investors who buy into this trust’s shares now are being paid an annual yield of nine per cent while waiting for the sector to return to favour.’

Sexton argues that ‘The fund holds quality property assets with good tenants and we view it as lower risk than many other funds in this sector. Following some disposals, it has a healthy cash position and a low level of net gearing at just five per cent. Unlike some real estate investment trusts (REITs), the trust has negligible refinancing risks,
with its debt comprised entirely of secured bonds due in 2017.’

He feels that ‘Commercial property is an asset class that suits the investment trust structure. Whereas some open-ended funds are being forced to sell off assets at knock-down prices to meet investor redemptions, this is not a problem faced by investment trusts such as F&C Commercial Property.’

Looking to Europe
Tim Cockerill’s suggestion for a more adventurous investor is JPMorgan European Fledgeling. He points out that ‘It is not the best environment for small companies, and there is an argument to suggest that the euro is overvalued. However, as a higher-risk investment, this trust looks like it could be interesting. Long-term, the fund has performed well, but, not surprisingly, of late it has been poor. But small companies have great potential for growth, even if it has been delayed for now, and across Europe the range and diversity in smaller companies is huge. Given such a large universe, a manager with the resource base to research the sector is important. This trust’s share price may get cheaper, but at a 16 per cent discount, it is worth watching. A good one to drip feed money into.’

He concludes, ‘In my view, the economic landscape for the next ten years will be different from that of the past ten. There is going to be a lot more regulation of banks and investment vehicles in general. Businesses, investors and consumers will be more cautious and, indeed, because of banks being more cautious, there won’t be the funds available for a lot of enterprises. Consequently, solid core investing, with a longer-term bias seems to be a sensible approach to take. So all portfolios should have a core of quality investments.’

Cockerill adds, ‘Adding higher-risk positions around the edges of a portfolio should work well but, at the moment, judging whether a fund is good value is quite tough. A sensible approach with new money would be to add it gradually, but it is important to have a long-term outlook of at least five years. It seems that there isn’t any great hurry to invest as the present market conditions will most likely last for much of this year.’

And Christopher Sexton observes that ‘The events of the past year have been traumatic for investors, businesses and consumers alike. So far, there is little sign of any improvement, either in economic growth or in financial markets. In equities, following substantial recent falls in markets, we think there are now selective buying opportunities.’

He adds, ‘But risks remain, and we are recommending that our clients stick with
their above-average cash and bond weightings, which they have had since mid-2007. When the time is right, which could be later this year, we will recommend that our clients use this firepower to increase their exposure to riskier assets such as equities.’