The 'hidden gem' investment trusts you should consider

Stephen Peters, investment trust analyst at Charles Stanley, looks at how the investment trust sector is dealing with a testing 2011.

The investment companies sector has certainly had a testing 2011 in terms of performance. The events of April, and those of late July and August have been a challenge for all investors, and the speed and magnitude of the decline have been hard to comprehend.

However, this leaves investment trust buyers in an interesting position. In most cases, discounts have not widened noticeably on many trusts that have seen the largest declines. Some trusts look historically expensive, as share prices have not fallen with net asset value (NAV).

In such circumstances, sensible investors should stick to what they know, and keep confidence in managers that have and continue to perform well. But the size of some of the falls in NAV does allow investors to start considering trusts they may not have historically considered.

J.P. Morgan Russia is one such name. Losing almost a quarter of its NAV over one month is pretty severe, especially as the MSCI Russia index ‘only’ fell by about 15% during the period. The trust does not trade at a particularly wide discount, and it has narrowed slightly during the market volatility.

But it is well managed by Moscow based Oleg Biryalov who has a good long term track record, is supported by the institutional capabilities of J.P. Morgan and with a market cap of nearly £300m gives investors reasonable liquidity.

Another trust that looks at a crossroads is TR European Growth. For a long time a great performer, it had lost its way in recent years. Now under new a new manager in Ollie Beckett of Henderson Global Investors, the trust has seen its asset value fall by almost 24% at the time of writing. On a 16% discount, it is not particularly cheap in absolute terms, especially given the liquidity of the underlying asset class.

European smaller companies are very much out of favour based on concerns over the region’s economic woes, but analysis by Montanaro (who are exceptionally bullish on European Small Caps and also run UK and European small cap investment trusts) we have recently seen paints a very different picture.

The forward price/earnings ratio of the sector is now at a level last seen in March 2009, and the long term cyclically adjusted PE of the region is some way below its historical average. Clearly sentiment can remain negative for a long time, but we think a trust and sector that appears so unloved is a big opportunity for the contrarian and patient.