My solution, as always, is to go for either an index tracker or look towards investment trusts. With an investment trust, we investors actually own the company, making the pockets that the company is trying to line our own. Today I’m looking at two trusts with different but complementary approaches.

Small is beautiful?

Strategic Equity Capital (LSE: SEC) is one of the smaller trusts with a market cap of £140m, and its aim is net asset value (NAV) appreciation.

Wednesday’s full-year results showed a 2.2% rise in NAV, against an 8.6% fall for the FTSE Small Cap ex Investment Trusts Total Return Index. In a tough year, I see that as a commendable performance.

Pointing out fears that the Trump-China trade war might escalate, and the UK’s Brexit effects linger, chairman Richard Hills makes what I think is an apt comment: “The whole UK stock market, on a global basis, is now generally considered to be cheap while simultaneously ‘uninvestable’ given the uncertain backdrop.”

While the trust has its focus on capital appreciation, rules that prohibit investment trusts from retaining any more than 15% of their income in any financial year mean a dividend has to be paid. At 1.5p per share, it amounts to a yield of only around 0.7%, but it’s of no real importance.

Investment trust shares typically trade at a discount to NAV, and for Strategic Equity Capital that’s averaged 15.2% over the past 12 months, which hints at undervaluation to me. The board thinks so too, and has invested £6.9m in buying back its own shares at an average discount of 15.9%.

I reckon we have a well-managed investment trust here, and I think the shares are a buy.

Big is better?

My second pick today is at the other end of the scale, in terms of size and strategy. A FTSE 250 company valued at £1.63bn, City of London Investment Trust (LSE: CTY) is a veritable dividend champion.

In March this year, the Association of Investment Companies named City of London as its top dividend hero. Heading a list of 20 trusts that had lifted their dividends for at least 20 years in a row, City of London had achieved that feat for 52 consecutive years.

And it went one further for the year ending June 2019, with a 5% hike in its annual payments to 18.6p per share. At the time, that provided a 4.4% yield. So we’re looking at inflation-beating rises, a very long track record of increases, and a strong yield. On its own, that looks like a good reason to invest, but from where is the trust generating the cash?

The company goes for dividend-paying UK equities, which I think is the perfect strategy for someone seeking dependable retirement income. Its portfolio holds some of our dividend giants, including Shell, HSBC, BP, Diageo, Unilever.

If you think a UK-centric approach is risky right now, every one of those companies is a big global player and has little real dependence on the UK economy. City of London is also on my investment shortlist.

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In the grand scheme of things, the trust is relatively small with net assets of only £185m at the end of December 2017. However, its size has not held it back. Over the past five years, the company has delivered an annualised net asset value total return per share of 20.4%, that’s compared to a return of just 15.5% for its benchmark small-cap index.

Working to unlock value 

Strategic Equity has been able to generate this outperformance thanks to its interesting strategy of finding companies that are looking to increase their value through strategic, operational management change. The investment managers then work with these companies to enhance shareholder value. This activist approach is different to the buy-and-hold approach employed by many other investment trusts, but Strategic Equity’s returns speak for themselves.

There were just 19 Holdings in the investment company’s portfolio at the end of December, and the top 10 account for nearly two-thirds of net asset value. While this sort of concentration might not be appropriate for other investment trusts, with Strategic Equity, the fact that the firm is engaging with its investments to unlock value, reduces risk. 

For example, one of the more substantial holdings, accounting for 8% of the portfolio at the end of 2017 was small-cap Wilmington. To help unlock value here, during 2017, Strategic Equity “put forward two experienced candidates” to replace the firm’s existing chairman. These new candidates should, according to the trust’s year-end update, help the market realise the value of “deeply undervalued” Wilmington.

At the time of writing, shares in this champion investment trust are trading at a 12.8% discount to net asset value and help unlock further value from the portfolio, management is buying back shares to reduce the discount.

Emerging market play 

Another investment trust I’d buy for my portfolio today is the JP Morgan Chinese Investment Trust (LSE: JMC). 

Every investor should have some exposure to emerging markets in their portfolio as these regions are growing at a much faster clip than developed regions. Also, China specifically is becoming a world leader in technology, and the country’s tech firms have grown to become some of the most significant and most important in the world over the past decade.

JP Morgan China is well positioned to take advantage of these trends. Over the past five years, the trust has produced a total return for investors of a little over 100% thanks to its extensive exposure to Chinese tech stocks such as Tencent and Alibaba. These two holdings account for just under 20% of the portfolio.

The one downside of this investment is its high price. The total annual charge is around 1.4%, which is nearly three times more than the annual dividend of 0.5% offered to shareholders. Still, I believe that this is a this is a price worth paying to invest alongside experienced investors in one of the world’s fastest-growing economies.

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As such, there could be further volatility in share prices for stocks trading on both sides of the Channel. Despite this, volatility and uncertainty in the short term could prove to be long term investment opportunities, as wider margins of safety may mean risk/reward ratios are more favourable at the present time. With that in mind, here are two investment trusts which could be worth a closer look right now.

Strong performance

Reporting on Friday was Strategic Equity Capital (LSE: SEC). It has enjoyed a strong performance in its most recent financial year, with its net asset value increasing by over 29%. This is ahead of its benchmark index by around 1%, and further outperformance could be ahead.

With all of its invested assets in UK-listed stocks, the company may lack the geographical diversification offered by other investment trusts at an asset allocation level. However at a company level, it offers some geographical diversity, although since it focuses on smaller companies this may be relatively limited.

That said, Strategic Equity Capital appears to offer upside potential. Its share price continues to trade at a discount to net asset value, with the discount being around 15% at the present time. Furthermore, the outlook for the UK economy may create investment opportunities over the medium term. Wider margins of safety may be on offer, and this could create a buyer’s market where risks are lower and potential returns are higher.

Diverse offering

While all of Strategic Equity Capital’s holdings may be UK-listed stocks, TR European Growth Trust (LSE: TRG) has a range of companies from across Europe in its portfolio. It is most exposed to German equities, with over 19% of its holdings listed in Europe’s largest economy. Beyond this, it has a mix of exposure to other leading European economies including France and Italy. This provides it with a high degree of diversity within Europe which could help to lower its overall risk profile.

With the company having outperformed its benchmark by around 111% in the last five years, it has an excellent track record of growth. Its top 10 holdings make up around 15% of the total portfolio. This suggests it is highly diversified even at a company level, and may be a sound means for an investor to gain access to a wide range of European stocks in a number of different countries.

Certainly, a tapering of QE next year by the ECB could lead to pressure on the region’s growth rate. But with international diversification and a strong track record of growth, TR European Growth could help its investors to generate a seven-figure portfolio in the long run.

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Over the long run, a low-cost FTSE 100 tracker or a diversified portfolio of individual stocks stands a good chance of exceeding the first of these growth rates by perhaps 1% a year, while some of the big-name growth- and small-cap investment trusts have achieved the second. But the third? Annual mid-teens historical returns are generally confined to risky and volatile microcaps — too risky for retirement money for some — and to funds investing in specialised sectors and strategies. They’re niche products so you shouldn’t be overexposed to any one of them, but as part of a portfolio that includes some household name investment trusts, they could play a vital role in ensuring your retirement is more comfortable — and arrives sooner — than a boring tracker could achieve.

Courting success

Burford Capital (LSE: BUR) is the world’s leading litigation funder, backing corporates in commercial and intellectual property disputes and enforcing judgements for a share of the awards. It has returned a spectacular 484.8% in the past five years, a figure unlikely to be repeated as the business is now mature. Nevertheless, an average annual return of 20-25% could be within reach. Profits are dependent on judicial decisions and exchange rates (most cases being in the US), so volatility may be high, making this a choice for investors with long time horizons.

Healthy returns

International Biotechnology Trust (LSE: IBT) has achieved the highest five-year return in the hot biotech sector, at 221%. With rich countries facing ageing populations and major medical breakthroughs increasingly achieved through technology, I believe IBT’s mix of medics, scientists and financiers are well placed to continue generating 25-30% a year from a global mix of listed and unquoted investments. The trust recently introduced a 4% annual dividend — great for retirees, but those not yet in drawdown should reinvest it.

Private pleasures

Private equity-owned businesses generally outperform listed ones. But, as the name suggests, the asset class is seldom available to the public. A few listed private equity trusts represent the exceptions, Pantheon International (LSE: PIN) being the UK’s longest-established and, in my view, best. Returning 168.3% over five years, it’s hugely diversified, by fund manager, stage, scale and geography, so the 11.8% annual NAV return achieved since inception, which includes a big hit following the global financial crisis, could be beaten. Second biggest holding in my SIPP.

Stellar strategy

A handful of fund managers aim to achieve private equity-like returns by investing in small firms where they believe they can exert influence on management to execute strategic change. The shining star among these is Strategic Equity Capital (LSE: SEC), which has generated a 177.2% return for investors over five years. Its share price fell slightly in 2016 because it moved from trading at a premium over Net Asset Value to a discount, as the small-cap IT sector fell out of favour. This makes it a smart buy now, raising the probability of achieving 12-15% a year growth going forward.

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