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It is not difficult to find equity-focused investment trusts that are worth buying at the moment.
Investor apathy means even companies with excellent track records of returns, both in an absolute and relative sense, trade at vast discounts to net asset value (NAV).
Moreover, the end of the world’s current era of monetary policy tightening looms large on the horizon. Interest rate cuts could even begin to be called for should the Federal Reserve’s hawkish stance lead to below-target inflation.
Equity-focused investment trusts are, therefore, likely to deliver improving share price returns as corporate profitability is boosted by a stronger economic performance that proves a positive catalyst for investor sentiment.
As a result of today’s widespread opportunities to buy high-quality investment trusts at bargain basement prices, investors can afford to be highly selective.
Since this column has highlighted many equity investment trusts that are worth buying over recent months, it is only fair to also flag those companies that offer less attractive risk/reward opportunities on a relative basis.
The Mid Wynd International Investment Trust was first tipped by this column in March 2018.
Since then, it has generated a 46pc capital gain versus a paltry 7pc rise for the FTSE 100 index.
And with its current managers having delivered a 184pc share price gain since first being appointed in May 2014, versus a 160pc rise for the MSCI AC World index, they have outperformed the trust’s benchmark.
However, one of the company’s two fund managers left recently and the other is set to retire later this year. This does not necessarily mean that the performance of the trust will worsen.
Indeed, it could improve under a new fund manager and produce even greater benchmark outperformance. But it does introduce an extra layer of risk for which this column does not feel investors are being adequately compensated.
The trust, for example, trades at a modest 2pc discount to NAV.
While this would normally be viewed as a very fair price to pay for what has been a strong performer over recent years, there are many investment trusts with similarly attractive track records trading at far more appealing prices.
They therefore offer significantly greater capital return potential over the coming years as improving investor sentiment prompts their ultra-wide discounts to narrow.
In Questor’s view, the trust also lacks income appeal.
Although it has met its twin aims of delivering high capital returns and dividend growth – with shareholder payouts having risen at an annualised rate of 7.6pc over the past five years – its dividend yield of 1pc (excluding special dividends) is relatively unattractive.
When interest rates were near-zero, this may not have been viewed as a deal-breaker.
But with yields of 4pc plus commonplace across equity markets and among other mainstream assets, a global trust may reasonably be expected to offer greater income investing appeal.
While the trust’s lack of gearing means its volatility has been relatively low, its long-term performance could lag those of other companies that employ debt to magnify returns.
Since Questor is very optimistic about the prospects for equities over the coming years and adopts a long-term outlook that is wholly unconcerned about short-term share price movements, it currently views the use of gearing in a positive light.
Of course, there is a lot to like about the trust. It has a sound investment process that seeks to unearth high-quality stocks across various themes including healthcare, automation and online services.
It also provides British investors with a high degree of geographical diversification, since it invests in a broad variety of regions.
A change in its management team means past performance counts for little when assessing its future prospects.
And with there being far better value opportunities available elsewhere, especially among trusts that have a greater focus on Britain, it is difficult to justify holding onto Mid Wynd International.
Investors should therefore quit while ahead. Given the opportunities available in the equity investment trust arena at present – as highlighted in recent columns – finding a replacement company that offers a favourable risk/reward opportunity should not prove to be particularly challenging.
Questor says: Sell
Ticker: MWY
Share price at close: 708p
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