CAUTIOUS OPTION

Daniel Lockyer, investment trust analyst at iimia, suggests that cautious investors look at a relatively new fund with a defensive, income-orientated portfolio. Henderson Diversified Income was launched in July 2007 so does not yet have a six-month track record. It will appear in the Global Higher Income sector.

Lockyer says, ‘The fund is managed by John Pattullo, who has established a strong reputation in the open-ended fund market with Henderson’s bond funds. The portfolio is invested 50 per cent in secured loans, a secured version of high-yield bonds, which secure an income for the fund. The remainder is spread around the high-yield universe, giving the opportunity for a higher income but with a relatively secure base to the portfolio.

‘The fund’s target is consistency of income, with capital preservation, rather than capital growth. It targets a yield of LIBOR plus 1.25 per cent, which currently means it is yielding above seven per cent. As it was launched just before the credit market crash, it was able to buy into many of its holdings at a much lower level. I would expect a total return at current levels of nine to ten per cent, with seven per cent coming from the income. The fund is actually registered offshore in the Channel Islands to ensure maximum efficiency in its income payouts, but its shares are listed in London and can be traded in the same way as any other investment trust.’

Contact: Henderson Global Investors
Tel: 0800 832 832 or visit www.itshenderson.com

BALANCED OPTION

Mick Gilligan, director of fund research at stockbroker Killik & Co, highlights the attractions of a global generalist portfolio with a slightly unusual structure. The shares of World Trust Fund are ranked second out of 30 trusts in the Global Growth sector over three years to 28 September 2007. They have returned 135.78 per cent over that period, compared to a sector average of 81.72 per cent.

He says, ‘The World Trust Fund aims to provide long-term capital appreciation by investing in undervalued assets (such as country funds, closed-ended funds, investment trusts and holding companies) with a tangible discount to net asset value, on a global basis. The fund is managed by Kun Deng of Lazard Asset Management, based in New York, and is denominated in US dollars.

‘One of the key differentiators between this fund and other London-listed global equity funds is its ability to hedge. This has been instrumental in protecting gains during periods of market weakness. A typical portfolio strategy involves some long exposure via a closed-ended fund on an attractive discount, with part of the underlying market exposure hedged out. The fund’s overall net market exposure is currently around 70 per cent. The strategy of buying investments that trade at a discount to their net asset value has worked well. From the end of July 1991 to the end of September 2007, the fund price appreciated more than 460 per cent in dollar terms – more than twice the return on the MSCI World Index over the period.’

Contact: Lazard Asset Management
Tel: 020 7588 2721 or visit www.lazard.com

AGGRESSIVE OPTION

John Moore, head of the collective investments service at Brewin Dolphin, suggests more adventurous investors cast their eyes in the direction of the biotech sector. The shares of The Biotech Growth Trust are ranked second out of three trusts in the Sector Specialist: Biotechnology & Life Sciences sector over three years to 28 September 2007. They have returned 37.27 per cent over that period, compared to a sector average of 120.62 per cent.

He says, ‘The biotech sector seems to be at a turning point, and The Biotech Growth Trust, which is one of the Frostrow Capital trusts, with the management of the portfolio outsourced to OrbiMed, should be in a good position to benefit. It feels like the big pharmaceutical companies are really struggling and turning their attentions to acquiring biotech companies. Of course there are risks associated with this sector, so it is better to play it by buying a basket of biotech shares.

‘If you believe we are entering a phase where growth is gong to outperform value, biotech is one place you would want to be. The momentum is starting to build and this trust offers a good way in as it is on a six per cent discount. If you look at the valuations, it probably shouldn’t be on a discount at all, so you have the possibility of a six per cent uplift before any of the growth starts feeding through. It is not without risks, and the OrbiMed team have underperformed recently, but they are very smart, have a good long-term record and have a lot of experience in the sector.’

Contact: Frostrow Capital LLP
Tel: 020 3008 4910 or visit www.frostrow.com
This article is from the November 2007 issue of What Investment.