Two UK equity trusts to own and three for growth

The UK stock market remains unloved but is cheap versus its own history. Investment trust analyst Thomas McMahon discusses the UK equity trusts he thinks stand out from the crowd, plus the growth-focused trusts that have piqued his interest.

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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 Wild: Are there any themes that grab your attention for 2024? Is it value, growth, income?

Thomas McMahon: It's certainly noticeable that in the short term, when there's news on interest rates, inflation, particularly on whether we've hit a peak, whether the next move is down, whether rate cuts are nearer, you do see the market move in a growth/value dichotomy. But over the course of the year, it hasn't really been the case.

If you were to look at an index level, it would appear to be the case, but that's because the big seven tech stocks have done remarkably well. You take those out of the equation, growth and value hasn't really driven the market. And I suspect that will continue to be the case. I think maybe quality will be more important, if we're in a weak economic environment, higher interest rates, companies that have more control of their own destiny have stronger balance sheets, and should be in a better position. So, that's probably going to be more important than growth versus value, I would say.

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Lee Wild: So, the UK is unloved at the moment, but it's cheap versus its own history. So, which UK equity investment trusts stand out from the crowd for you and why?

Thomas McMahon: The UK is certainly cheap, it has been cheap for a while. So, investors, they've heard it all before, but I think this situation just can't persist and we see an increasing amount of M&A activity in a variety of different sectors over 2023.

And one way or another, the prices on offer for UK assets are too cheap, so they have to change. You're really spoilt for choice. If you really want to take the value angle, Aberforth Smaller Companies (LSE:ASL) is an interesting way to look at the UK small-cap space. It’s the one really proper value strategy in the small-cap space and it's beaten the peers handsomely over three years, had two very good years in succession.

They've received a number of approaches for companies in their portfolio kind of backing up what I'm saying that overseas investors who are paying large premiums to the share price. At times, the managers will say that they don't think it's enough, it's still cheap, even at this 30% premium that's being paid. So, I think that's one that stands out given the value opportunity.

I think if you wanted to be quite aggressive, or take some risk for the long term, Henderson Opportunities (LSE:HOT) Trust is really interesting. A relatively small portfolio, it's always quite geared, and it's very exposed to small and mid-caps. It's always quite aggressively positioned, tends to do really well in in rising markets and really badly in falling markets. So, if you wanted to bet on a long-term really strong returns from the UK, that could be an interesting one.

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Lee Wild: Thomas, are there any growth-focused investment trusts that interest you at the moment?

Thomas McMahon: The outlook for growth is quite troubled, but there's a number of investment trusts that focus on a growth area that are potentially quite interesting at the moment because of valuations.

So, for example in Japan, Baillie Gifford Japan (LSE:BGFD) trust is actually trading on a cheaper valuation than the market, even though it's got substantially higher growth metrics on a backward-looking and forward-looking basis. So, I think that really shows you an example of a sell-off in a growth stock that's really gone to quite dramatic levels.

So, that stands out as potentially very interesting, particularly if you get a change in the economic environment in Japan, which has for many years, because of its own economy, favoured growth over value. We've seen a bit of a cyclical rebound in 2023, but if we revert to the old way of doing things, then this looks like really interesting valuation.

I think in the UK, BlackRock Throgmorton Trust (LSE:THRG) historically has been an absolute outstanding performer and certainly could be interesting at the moment if you can take a longer-term view.

Also, another interest rate-sensitive area, which could be worth considering, [even though] there’s a lot of negativity around commercial property for obvious reasons to do with valuation of property when interest rates are higher, is TR Property (LSE:TRY).

It invests in property equities and a little bit of indirect property, is still on a discount and it's responded very dramatically to a change in mood on interest rates, which perhaps illustrates there's a lot of value in that market, even though it might be quite hard to pick individual trusts, individual REITS, individual buildings, which are going to do well, TR Property can really invest across Europe into very cheap real estate. The whole market is very cheap right now. So, I think that is another one that stands out with potentially interesting kind of growth, interest rates, investment.

Lee Wild: Thomas McMahon, investment trust research manager, Kepler Trust Intelligence, thanks very much for joining me today.

Thomas McMahon: It's a pleasure.

Lee Wild: And thank you for watching. And make sure you subscribe to the interactive investor YouTube channel.