The broker Numis has recently updated its list of recommended investment trusts, with the changes including five new core buys. These are funds where they think the share price will outperform the benchmark on a risk-adjusted total return basis, rather than specific country or style allocation calls.
Three trusts have also been removed: Asia Dragon (LON: DGN), Baillie Gifford UK Growth (LON: BGUK) and Polar Capital Technology (LON: PCT). The first two were discarded after difficult periods of performance, while the latter was swapped for Allianz Technology (LON: ATT), where the manager has shown that he can successfully execute a highly active approach in a volatile sector.
Riding The Wave
Numis are enthusiastic about the outlook for the biotech sector and think that the fundamentals remain compelling, despite a difficult period of performance. Because of this they have added RTW Biotech Opportunities (LON: RTW) to their list of core buys.
There are numerous tailwinds for the sector that give them grounds for optimism. These include: the rapid pace of innovation; the ageing population adding to the demand; as well as increasing M&A, as the large pharma companies approach a patent cliff edge; with the prospect of lower interest rates helping to support the valuations.
RTW has a well-resourced management team that has shown that they are able to capitalise on market dislocation, with a third of the 15 biotech IPOs since the start of 2023 being in the portfolio. Numis believe that the discount of just over 30% offers significant value.
Learning The Lesson
Their second addition is Smithson (LON: SSON),which holds a concentrated portfolio of 30 small and mid-cap companies. These consist of global stocks with strong competitive positions and robust balance sheets that can sustainably generate high margins.
The broker says that the rotation away from growth and poor sentiment towards small-cap companies has challenged the fund’s track record. It has also paid the price for holding several stocks with high valuations, as well as some with small operational issues that should have acted as red flags.
Numis believe that the manager has learnt from his mistakes without having to change the core of the investment process. They think that the portfolio has sound fundamentals that put it in a strong position to outperform over the long-term and that the shares offer value on a 12% discount, especially in view of the buyback policy.
Straight Swap
Next on the list is Allianz Technology (LON: ATT),which replaces its fellow sector specialist Polar Capital Technology (LON: PCT). One of the key reasons for this is its well-resourced team with feet on the ground in the US, where they can keep up to speed with the latest investment ideas and meet the people at the heart of the companies.
The fund takes a bottom-up stock picking approach driven by exposure to key themes, with relatively high turnover in what is a dynamic, fast-moving sector. It is run by Mike Seidenberg, who has done well since he took over from Walter Price in June 2022.
Numis believe that the well-resourced management team leaves it well-placed to outperform, particularly if market leadership shifts away from the ‘Magnificent Seven’ AI-related winners. The shares currently trade on a 12% discount to NAV.
Double Discount
Another of their new additions is AVI Global (LON: AGT), which has an unusual mandate in that it seeks to find overlooked, undervalued stocks with a potential catalyst to narrow the discount. The portfolio consists of a mixture of investment trusts, holding companies and Japanese shares, with the managers actively working to improve corporate governance to unlock the value.
AVI offers discounted exposure to cheap investment trusts including a basket of listed private equity funds, as well as Hipgnosis Songs. There are also various European holding companies, such as EXOR and Aker, as well as alternative asset managers like KKR and Brookfield AM.
Numis think that it might be a good time to invest in the fund, based on the double discount. The shares trade nine percent below NAV and there is significant value in the underlying holdings, which trade on a weighted average discount of 33% as at 31 December.
New Frontiers
The last of the core additions is BlackRock Frontiers (LON: BRFI) that offers an attractive way to gain exposure to a broad range of frontier markets. It is run through a hybrid approach of bottom-up stock picking and top-down analysis, based on both fundamental research and the latest geopolitical developments.
BRFI invests in the smaller emerging and frontier markets, in an attempt to benefit from under-researched opportunities in countries such as Vietnam, Hungary and Chile. Within these areas the managers try to take advantage of mispriced value and long-term growth opportunities, with the end result being a concentrated portfolio of between 35 and 65 stocks.
Numis rate the management team highly and say that they have built an excellent long-term record through stock selection and asset allocation. The fund suffers from investor apathy towards the asset class, which is why they think the seven percent discount offers value.