Picking winners

With more than 30 years service as the fund’s investment manager, Simon Knott has a long track record for picking winners. He uses a bottom-up investing approach to seek out small-cap companies that are trading at a discount to their fundamental value.

Knott likes to maintain a very concentrated portfolio of his high-conviction picks. The fund’s five biggest holdings in its portfolio account for 60.6% of its investments, and they include Colefax Group (23.9%), Titon Holdings (11.6%), Macfarlane Group (11.0%), Treatt (8.3%) and Elecosoft (5.8%).

Although a concentrated portfolio gives investors greater exposure to Knott’s best ideas, with the objective of generating outperformance against its benchmark, a concentrated approach can also lead to more volatile returns.

Shareholder-friendly

Surprisingly for a fund focused on small-caps, Rights & Issues comes into its own in terms of costs. With an ongoing charges figure of just 0.41% last year, it is one of the cheapest funds to own, not just for small-caps but across all markets.

The fund’s shareholder-friendly approach is likely due to its self-managed structure, which means the trust doesn’t incur unnecessary costs, like having to pay a lot of third-party advisors. Another reason is that board members own substantial stakes in the investment company itself, aligning their interests with those of external shareholders.

To demonstrate, the fund has consistently kept portfolio turnover very low, incurring just over £30,000 in transaction costs over the past two years.

Moreover, the trust has been proactive in addressing its discount to NAV — the extent to which its share price is lower than its NAV per share — by aggressively buying back its own shares. Share buybacks at a price below NAV create value for continuing shareholders, by increasing its NAV per share and potentially causing the discount to narrow.

High income

Another highly-rated fund is the Chelverton Small Companies Dividend Trust (LSE: SDV). The diversified small-cap fund aims to deliver a high and growing income through investing in high-yielding companies capitalised at less than £500m.

It only invests in a company for the first time if it yields at least 4% on a 12-month horizon. This is a cast iron rule to which there are no exceptions. Aside from a high dividend yield, the fund managers look for companies with strong management teams and which generate cash on a sustainable basis, to avoid buying into value traps. This means that although the fund employs a strict screening process, it doesn’t invest in a stock just because of its high yield.

Optimistic

Notwithstanding the recent stock market sell-off, fund managers David Horner and David Taylor are optimistic on the outlook for UK corporate earnings. Additionally, they reckon current valuations are broadly supportive, with dividend growth for its portfolio looking set to remain strong.

In terms of its past performance, the trust sits in the top quartile position in the UK equity income sector, with a NAV total returns of 118% over the past five years. Shares in the trust currently yield 3.6%.

The post These small-cap investment trusts have been crushing the FTSE 100 appeared first on The Motley Fool UK.

They offer investors exposure to all different types of assets, from property to airplane leases, and are managed by experienced professionals. With such an eclectic range of assets on offer, they are great tools to use to diversify your portfolio. 

Profit through diversification 

The Henderson Alternative Strategies Trust (LSE: HAST) is a great example. This company has a broad investment mandate and aims to exploit “global opportunities not normally readily accessible in one vehicle” with the goal of constructing a “diversified, international, multi-strategy portfolio which also offers access to specialist funds including hedge and private equity.“

Henderson’s broad mandate means that the instrument offers excellent diversification away from traditional stocks. Over the past five years, shares in the trust have outperformed the broader market returning 29.6% compared to the FTSE 100’s return of 27% excluding dividends. 

According to the latest set of figures from the company, net asset value per share increased by 10.8% for the year to 30 September to 335.4p. So, based on these numbers, at the time of writing the shares are trading at a discount to NAV of 12%. 

As well as managing a well-diversified portfolio, management is also committed to returning cash to investors. At the beginning of the year, it initiated a tender offer to acquire 10% of the trust’s outstanding shares — the second such tender in three years. Also, the company increased its regular dividend by 25% to 4.75p alongside full-year figures, giving a yield of 1.3%. 

Overall, if you’re looking to add some diversification to your portfolio for the next 10 years, Henderson could be the right option for you. 

Top small-cap picks 

Another trust you might regret not buying 10 years from now is the Rights & Issues Investment Trust (LSE: RIII). 

It invests in UK small-caps. Over the past year, as small-caps have rallied, shares in the trust have gained 24%. The portfolio is dominated by three top holdings, RPC Group, Treatt, and Scapa Group, which together account for just over 40% of the portfolio. This concentration might put off some investors, but over the past few years, all three of these companies have powered ahead, and it looks as if management has made the right decision betting on their success. 

Growing with the business

Going forward, it looks as if it will make an excellent holding for your portfolio. Shares in the trust are currently trading at a discount to NAV of 12.6% (NAV 2,424p), and management is working to reduce this discount via a share buyback. For the six months to the end of June, Rights & Issues had spent £5.9m to acquire 4% of its outstanding shares. As well as the buyback, management is returning cash via the dividend. Based on last year’s numbers, the shares support a dividend yield of around 2.4%.

All in all, if you’re looking for an investment trust that’s not afraid to take big bets on exciting small-caps, Rights & Issues might be for you. 

The post Two investment trusts you might regret not buying in 10 years appeared first on The Motley Fool UK.