Tech trusts, discounts and a contrarian play in 2025

Thomas McMahon at Kepler Trust Intelligence names the investment trusts he thinks will do well in the year ahead. He also looks at favourite sectors, sustainable funds and the regions you might want exposure to.

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Lee Wild, head of equity strategy, interactive investor: Hello. With me today, I have Thomas McMahon, head of investment companies research at Kepler Trust Intelligence. Hi, Thomas.

Thomas McMahon, head of investment companies research at Kepler Trust Intelligence: Hi Lee.

Lee Wild: Great to have you with us again. Thomas, there are still plenty of investment trusts trading on steep discounts and others that have done well and could do even better. Any trust you think will narrow discounts in 2025?

Thomas McMahon: Well, I think the silliest discounts in the investment trust sector at the moment are the technology trusts. We've spoken about technology already and obviously people worry about whether they're a bit late to buy in now after such a strong year.

Well, the investment trusts are trading on double-digit discounts. So, Allianz Technology Trust Ord (LSE:ATT), for example, Polar Capital Technology Ord (LSE:PCT), they're both on double-digit discounts and I think that isn't going to last in my view. I'd be very surprised. So, I think that really stands out.

I think if you're braver, you've got a higher appetite for risk, and I'm not sure that includes me, then I do think that China is a big contrarian buy at the moment.

Obviously, everything is negative around China. The outlook for economic growth is weak. Stimulus is not what was hoped for. Tariffs are expected to come in. But it's really, really cheap because of that and the discounts of 13-15% on JPMorgan China Growth & Income Ord (LSE:JCGI), or any of the other trusts in the sector are about that level, Fidelity China Special Situations (LSE:FCSS).

A lot of those companies aren't really that dependent, the companies they own aren't really that dependent on exports. You know, the tech-type things. So, I'm not saying I'm jumping in there myself, but I think with an eye on a discount over the long run, that could perhaps be quite interesting.

Lee Wild: Yeah. I guess it's just that tariff, threat of the tariff, it's overhanging and affecting sentiment.

Thomas McMahon: But, you know, it could be much, much better than we expect, right? So, we know what's been threatened. But I expect the Chinese companies and the Chinese government will find a way to mitigate the effects. And, of course, it may be that there's a deal done.

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Lee Wild: Thomas I'd like to talk about sustainable funds, wind, solar and others, which have been under pressure from high interest rates, and now the election of Donald Trump in the US, that's heaped further misery on the sector. So, what's your view on green funds and the outlook for 2025?

Thomas McMahon: Well, first of all, I think you need to distinguish between what Trump can affect and what he can't affect.

So, we take an investment trust like Greencoat UK Wind (LSE:UKW). This is UK wind farms. It's not really significant what Trump does directly. Of course the interest rate picture might be significant, but you know that they're kind of in a bubble, if you like.

I think if we look at renewable equities, clean-energy related stocks, and we distinguish the political theme from the investment theme, they're not really in sync.

So, a lot of the renewable energy companies actually did well under the first Trump presidency, largely at the end of it because of the pandemic, but nonetheless, and they cratered under Biden because of the interest rate environment and the inflation environment, so it wasn't really the politics that was driving that so much.

With the incoming administration, I think the worries are about the Inflation Reduction Act, Joe Biden's act that had lots of different elements to try and encourage investment in renewable energy. I'm not sure that Trump's going to ditch it wholesale, he may want to get rid of some of the subsidies, but equally, there are some tax breaks in there that he might keep, and a lot of the renewable energy installation is actually in red states, and brings a lot of jobs, so I'm not sure he's going to be quite as bad for the sector as people fear.

I expect the energy transition will be slower and there'll be more competition from oil and gas and so on. But at the same time, Biden gave [out] more oil and gas permits than Trump. So, I don't think it's quite as clean cut as 'Trump is bad for renewable energy'.

In fact, I met recently with BlackRock Energy and Resources Inc (LSE:BERI) managers, and they were actually adding a little bit to some of the renewable energy stocks when they sold off. They can invest in both oil and gas, fossil fuels and energy transition, and in their view, the valuations are pretty attractive.

Lee Wild: With the, as you say, more domestic-focused Greencoat, it's not necessarily what's going to happen in the States that's the big driver, it's interest rates.

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Thomas McMahon: Yeah, and power prices. Those UK power prices, which, you know, is not something that's going to be directly affected by Trump having a negative view on insulation. But again, under the first Trump presidency, the US actually installed more solar and wind power plants than it did under Biden. So, I don't think Trump's going to be there to attack renewable energy per se, he's just not going to subsidise it.

Lee Wild: Investors have for a number of years been focusing on global funds and investment trusts. Could you pick out a region that stands out for you and the investment trust to play that theme?

Thomas McMahon: Well, boring choice, but based on what we have been discussing, the US stands out because I think there, clearly, you've got an administration that wants growth and that wants the stock market to do well. Whereas, we look at emerging markets, China is a big stumbling block, and in Europe, we've got governments that are throwing obstacles in the way of new industries as they develop.

In particular in the US, I would highlight biotech, which is fundamentally a US industry. I think with Republicans in power in all parts of the government, I would expect there to be less regulation. I would expect them to be more favourable towards M&A. And there are some structural reasons why biotechnology is looking quite attractive on a three to five-year view.

One of those is that the large-cap pharmaceutical companies have a big set of patents that are expiring on blockbuster drugs and they need to replace those, and the obvious way to do that is to find the companies that are developing new drugs and buy them, so I would expect that to be a big theme.

Actually the sector, it did jump a little bit when Trump won, but since then it retreated a bit when Robert F Kennedy Jr was appointed to the administration, there was a bit of a sell-off. He's known as being a vaccine sceptic or big pharma sceptic, and a bit of maybe a conspiracy theorist.

But what I would say about that is, there was a famous picture of him on his boss's [Donald Trump's] aeroplane eating a McDonald's hamburger, he's very anti-junk food. I think that's a good metaphor. I think that RFK Jr is going to eat the hamburger that Donald Trump tells him to eat, and the policy is going to be Donald Trump's, not RFK Jr's.

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Lee Wild: Thomas, in terms of sectors, a standout for the past couple of years has been technology, a conversation around valuations and spending on AI rumbles on, but prices have been moving steadily higher. I say steadily higher, they've been racing higher. What do you think about the tech sector now and some of the trusts that you think are still worth owning?

Thomas McMahon: Yeah, I do think the discounts make them really attractive. I think Allianz Technology Trust in particular, which tends to be underweight NVIDIA Corp (NASDAQ:NVDA), and anything above 10%, basically it tends to limit its large positions and have a bit more in mid- to large-caps, that could be quite interesting if the technology sector broadens.

I think it's very hard to predict anything over 12 months and obviously we could see a correction over 12 months. But if you take a five to 10-year view, I think it's quite clear that technology is going to drive innovation throughout the economy and that earnings are going to be great in many of these businesses.

Software, there will be new software companies doing new things with new tools, so I think having exposure is still very attractive and they're currently on a discount.

Lee Wild: Thomas McMahon, head of investment companies research at Kepler Trust Intelligence, thanks very much for joining me today.

Thomas McMahon: It's a pleasure.

Lee Wild: And thank you for joining us, too. And don't forget, you can see more ii fund manager interviews on the ii YouTube channel.