Following a tricky year for trust-pickers, marked by persistently wide discounts and lacklustre performance across the investment trust universe, Winterflood Securities has unearthed eight gems that it believes are ripe for a rerating.

The period encompassed a tough few years for investment trusts, where discounts remained stubbornly wide at an average of 14.7%, while the sector underperformed the FTSE All-Share, returning 8.7% versus an index return of 9.5%.

Of the 37 funds that made up Winterflood’s recommendations list in 2024, a total of 20 – or 54% – outperformed in share price terms against their most relevant index.

In a ‘2025 recommendations’ update published on 9 January, the broker’s trust-picking team, led by Emma Bird, introduced eight new names and removed nine funds. The research team focuses on trusts with proven managers, strong long-term performance records, defensive characteristics, and those that offer potential downside protection and value opportunities.

The average discount across the recommended trusts is 18%, with 23 of the 36 names trading at double-digit discounts. Liquidity remains key, with the average market cap of funds on the buy list sitting at £1.4bn.

UK equities

There have been two switches in the UK equity section of the buy list. First off, Finsbury Growth & Income (FGT ) has been axed in favour of Mercantile (MRC ).

It has been a challenging few years for Finsbury Growth & Income, which is run by veteran Lindsell Train manager Nick Train and targets quality growth stocks. The £1.4bn trust has lagged both the tech-led and ‘value-switch’ recoveries we saw following the pandemic, and faces its first-ever continuation vote early next year.

Mercantile, which is a corporate client of Winterflood, features as one of only two trusts that focus on UK small and mid-caps. Bird pointed to Mercantile’s strong long-term track record, with a net asset value (NAV) return of 101% over the past 10 years, outperforming the 61% increase from the FTSE All-Share.

The portfolio, run by JP Morgan’s Guy Anderson and Anthony Lynch, has also beaten the index over one, three and five years.

The trust currently trades on a 10.4% discount, which Bird said ‘does not offer particular value relative to the average discount of 10% over the last five years’. Nevertheless, she doesn’t expect to see the discount widen from here, given the board’s policy of share buybacks, which have totalled £80m since 2022.

‘We would expect the fund to benefit in terms of strong relative NAV performance and a rerating in the event that sentiment towards UK equities turns more positive, further supported by the fund’s historically high gearing level of 15%, which reflects the managers’ current optimistic outlook,’ Bird explained.

Value-focused Temple Bar (TMPL ) was added to the list, replacing Law Debenture (LWDB ), the unique fund that targets both income and growth from a portfolio of UK stocks managed by Janus Henderson as well a set of specialist financial services business that is run separately.

Temple Bar trades at an 8% discount, which Bird said is higher than the 5% average over the past 12 months, and therefore offers ‘relatively attractive value’. The fund is managed by RWC’s Nick Purves and Ian Lance. 

Bird noted that since RWC took control in 2020, the NAV has grown 124% – almost double the FTSE All-Share’s gain of 65%.

Asia Pacific equities

An underweight to troubled China has boosted returns at Schroder Asian Total Return (ATR ) and earned it a place on Winterflood’s recommendations list.

The £455m trust, run by Schroders’ Robin Parbrook and King Fuei Lee, has replaced Pacific Horizon (PHI ). Bird pointed to its unconstrained approach which led to a ‘notable underweight’ in China. The fact that the team is able to use derivatives and can move down the market-cap scale helps to differentiate it from peers. The Schroders trust is a corporate client of Winterflood.

Bird said the managers have been able to capture significant growth opportunities as well as protect investors in more difficult market conditions.

The all-weather portfolio is one of the highest rated in its peer group, with the shares trading at a discount of 6% versus a 12% average for its sector. Since Schroders took over the trust in 2013, the NAV has risen 192% versus an 84% increase in the MSCI All Companies Asia Pacific ex-Japan index.

Showing decidedly downbeat sentiment towards China, Bird cut Fidelity China Special Situations (FCSS ) from the buy list and did not replace it. The £1.1bn trust, run by value hunter Dale Nicholls, has fallen short of the MSCI China index over one, three and five years. Its 15.7% NAV return over the past 12 months was a return to positive territory but it still wasn’t enough to beat the 23.3% return from the index.

Japan equities

AVI Japan Opportunity (AJOT ) has taken the place of Nippon Active Value (NAVF ) within Japanese small caps.

Both trusts operate an activist approach and trade close to NAV. AVI is the smaller of the two at £211m but Bird said it had ‘grown considerably since launch’ in 2018, including its ‘on-the-ground presence’ in Japan.

‘While the shares are currently trading around NAV, downside discount risk is mitigated by the annual 100% exit opportunity, with the frequency recently increased from every two years, and the board’s commitment to buying back shares if the average four-month discount exceeds 5% in normal market conditions,’ said Bird.

Since launch, the fund has delivered a NAV total return of 67% – almost triple the 23% increase in the MSCI Japan Small Cap index.

‘The fund is well-placed to take advantage of Japanese corporate governance reform and to generate strong returns from investment in over-capitalised small-cap businesses,’ said Bird.  

The fee structure also provides ‘good alignment’ between management and shareholders, with the annual management fee being based on the lower NAV and market cap, and at least 25% of the fee is invested in AJOT shares.

Property

A ‘considerable rerating’ for Schroder Real Estate (SREI ) saw it rotated off the buy list and replaced by Custodian Property Income (CREI ), which is trading at a wider discount.

Shares in the portfolio are currently sitting at a 23.2% discount to NAV, making it more attractive to Bird than the Schroder trust, which is at a discount of 18.9%.

Custodian is now the largest diversified UK commercial property trust in the market with a market cap of £321m following a spate of corporate activity last year.

‘This, combined with the focus on smaller lot sizes, means the portfolio is well diversified, reducing asset- and tenant-specific risk,’ said Bird.

Targeting smaller properties also provides a ‘yield advantage’ given the assets are off the radar of most peers.

‘This supports Custodian’s attractive prospective dividend yield of at least 8.2%, which is fully covered by earnings, and the fund has increased its annual dividend each year since 2021, following a cut in response to the Covid pandemic,’ said Bird.

It has delivered a NAV increase of 16.6%, or 3.1% annualised, in total return terms over the five years to the end of September, outperforming the 1.2% annual return from the MSCI UK Property index. Bird believes the outperformance will continue given its asset management skills and sales at a premium to book value.

Supermarket Income (SUPR ) was also added to the list as a ‘buy’ given its specialist exposure and ‘supportive fundamentals’.

The £823m trust buys up ‘omnichannel’ stores – which are used not just as grocery stores but also fulfilment hubs for online orders – meaning it ‘benefits from the structural trend of e-commerce growth’.

‘These supportive fundamentals ensure affordability of rents for the fund’s tenants, as well as driving market rental growth, particularly for omnichannel stores,’ said Bird.

The trust enjoys a 100% rent collection rate and a fully covered dividend, which has been increased every year since launch in 2017, helped by the fact that 80% of the rental contracts are inflation-linked.

‘Supermarket’s current discount of 24%... offers significant value relative to history,’ said Bird.

‘We think that there is scope for a rerating, given the stabilising underlying valuations, supported by a more benign interest rate environment, with the fund’s relatively large size… making it a likely beneficiary of an improvement in sentiment towards property as an asset class.’

Private equity

Within the private equity picks, Winterflood opted to increase its fund-of-funds exposure to the detriment of Oakley Capital Investments (OCI), where ‘disposal activity has been limited in size and not at substantial uplifts’.

To fill the gap, analysts added HarbourVest Global Private Equity (HVPE ) trust, which weighs in at a heavyweight market cap of £1.9bn but also trades on a very substantial 40% discount.

The fund takes a broad-based approach to investment and ‘idiosyncratic risk is minimised by diversification across stages, strategies, and geographies’. The 30% allocation to venture and growth equity also sets it apart from its peers and has been a driver of performance, although it detracted in 2022.

‘We would argue that while the exit environment for early-stage businesses has been inhospitable, this is now more than priced in, given the venture allocation has seen a 20% writedown since 2021,’ said Bird.

She added that the fund will benefit from a ‘broad-based recovery’ in valuations given the mix of assets and that a pick-up in activity will be reflected in the portfolio.

The fund has performed well over the past five years despite the drag from venture, delivering a NAV total return of 104% against 89% for its private equity peer group and 27% from the FTSE All Share.

Infrastructure

The small size of Downing Renewables & Infrastructure (DORE ) has held the trust back and lost it its place on the Winterflood buy list.

The £140m trust has been replaced by sector behemoth 3i Infrastructure (3IN ), which has a huge £2.9bn market cap and invests in ‘core-plus infrastructure assets’ across four ‘megatrends’: energy transition, digitalisation, renewing essential infrastructure, and demographic change.

The discount has widened substantially in the past year, from 8% at the start of 2024 to a current level of 17%, despite a pick-up in private deals.

Bird said the track record was ‘excellent’, despite the rising cost of capital, with the NAV increasing 85% over five years, versus 37% for the S&P Global Infrastructure index. Although, remarkably, the shares have only managed a 28% rise, giving rise to the discount.

She said managers Scott Moseley, Bernardo Sottomayor, and Rob Collins have ‘proven their ability to exploit value-accretive capex opportunities’.

Since 2016, the fund has achieved a 37% average uplift on the realisation of its assets, and this trend continued in 2024, with it receiving a binding offer for its 33% stake in renewable energy operator Valorem at a 15% uplift to the last valuation.

‘The fund’s track record of disposing assets at a premium… leads us to question the sustainability of the fund’s discount, particularly given the robustness of earnings growth within the portfolio, and the abundance of dry powder in private markets,’ said Bird.