Four investment trusts to make big profits in 2023

Which investment trusts are best placed to deliver positive returns in 2023? Kepler’s Thomas McMahon names the trusts he likes, as well as his top wealth preservation trust and important themes for 2023.

• Invest with ii: Buy Investment Trusts | Top UK Shares | Open a Trading Account

Lee Wild, head of equity strategy, interactive investor: Hello, with me today I have Thomas McMahon, Investment Trust Research Manager at Kepler Trust Intelligence. Hi Thomas.

Thomas McMahon, investment trust research manager at Kepler Trust Intelligence: Hi Lee.

Lee: Good to see you again. Now are there any themes that really sort of grab your attention for 2023? Which ones do you think will dominate the next 12 months? I mean is value investing the way to go? Will cyclical stocks begin to recover? And should income be the real focus for investors? Any or all of those?

Thomas: I think the value and growth distinction really drove markets from 2019, 2020 and early 2021. I don't think that's going to be the driving factor going forwards, I think there's been a lot of repricing of interest rates and in growth stocks, so the premium of growth stocks over values come down a lot. I don't think that's going to be the driving factor. In fact, if you look at 2022, at the time of writing, the MSCI World Value index is down around 5 - 6% and the MSCI World is in dollars and MSCI World Energy Index is up around 50%. So value hasn't done well. Energy has done well, basically. I think that the energy factor is going to continue to do well. There are lots of reasons that companies are loath to invest and generate new supply. So, I think prices will remain relatively elevated even though, you know, recession is clearly around the corner.

I think probably quality is going to be a more significant factor. Probably you want to be looking for companies that have strong balance sheets, don't need to refinance, have strong market positions. Those are the ones that tend to do better in a weak economy. Although this may mean that they simply lose less than the market. But nonetheless, that's probably, I think, more likely to to do well over the coming year.

• Watch other video with Thomas McMahon: my best bits from 2022 and investment outlook for 2023
• Visit our YouTube channel to view our experts’ tips for 2023

Lee: In terms of investment trusts, which ones do you think are best placed to deliver positive returns in 2023?

Thomas: Well I think, you know, if you're a cautiously minded investor, I think the Ruffer Investment Company (LSE:RICA) have done a really good job in the current environment and I think they're still well set to do the same again. I'd be pretty confident that they would deliver positive returns if even you see pessimistic scenarios, if you want to be a bit more positive, you know, I do expect markets to recover at some point during the year.

I think turning to the US, so Brown Advisory US Smaller Companies (LSE:BASC) is an interesting investment trust. So it's small-cap growth, but with a very strong quality element. The manager tends to avoid speculative, profitless companies. I think the US will probably lead us out of the recession just as it led us in. And I think that's a very is a very interesting stock picking manager. And you know US equities is going to continue to be a major growth engine for the world. I think in the UK, JP Morgan Small Cap and JPMorgan Mid Cap (LSE:JMF) have a very strong track record of doing well in rallies and strong markets. So maybe we're not quite there yet, but that's somewhere that I'll be quite interested in looking at when things turn positive.

I think in Europe, you know, the sentiment around Europe is, is dire, it's diabolical. And I think Henderson European Focus Trust (LSE:HEFT) Trust looks quite interesting next year. So the managers have quite a contrarian approach strategy, which means that I think they're going to be able to look through the indiscriminate sell off and find the good quality companies when they're at their most unloved. So I think those are some examples of trusts I think that can be quite interesting. But as I said, you know, things are probably going to get worse before they get better. So whether this is the right moment to buy, who knows?

• The best and worst-performing investment trusts of 2022
• Watch our video: Bargain trusts for 2023 – and Scottish Mortgage outlook

Lee: So, you mentioned Ruffer. Why do you pick out of all the, I guess, the wealth preservation trusts like Capital Gearing (LSE:CGT), Personal Assets (LSE:PNL), RIT Capital Partners (LSE:RCP)? What about Ruffer that stands out for you?

Thomas: A couple of things have worked for it. In its equities, they've tended to be a bit more exposed to values and then growth and quality growth and so forth. So that's helped them. The derivatives, the protective strategies both in terms of interest rates and credits, they've used those very well and they've had a significant value and that's been very important in volatile markets. So Capital Gearing, Personal Assets have some themes in common. But I think those are the two things that have just made the difference this year. That doesn't mean they will do in the future, but I think, you know, I think the team have done really, really good job of reacting tactically as well as being quite in tune with where the economy's going at the moment. I think you mentioned RIT Capital as well, RIT Capital over the last couple of years have put a lot of money in unlisted investments, which means that they've got some exposure to VC, to tech and to China, and that has dragged on returns a bit. So it has got a bit more risk than perhaps it did in the past.