Strategic Equity Capital (LSE: SEC) is, in my opinion, one of the market’s most underappreciated investment trusts.
In the grand scheme of things, the trust is relatively small with net assets of only £185m at the end of December 2017. However, its size has not held it back. Over the past five years, the company has delivered an annualised net asset value total return per share of 20.4%, that’s compared to a return of just 15.5% for its benchmark small-cap index.
Working to unlock value
Strategic Equity has been able to generate this outperformance thanks to its interesting strategy of finding companies that are looking to increase their value through strategic, operational management change. The investment managers then work with these companies to enhance shareholder value. This activist approach is different to the buy-and-hold approach employed by many other investment trusts, but Strategic Equity’s returns speak for themselves.
There were just 19 Holdings in the investment company’s portfolio at the end of December, and the top 10 account for nearly two-thirds of net asset value. While this sort of concentration might not be appropriate for other investment trusts, with Strategic Equity, the fact that the firm is engaging with its investments to unlock value, reduces risk.
For example, one of the more substantial holdings, accounting for 8% of the portfolio at the end of 2017 was small-cap Wilmington. To help unlock value here, during 2017, Strategic Equity “put forward two experienced candidates” to replace the firm’s existing chairman. These new candidates should, according to the trust’s year-end update, help the market realise the value of “deeply undervalued” Wilmington.
At the time of writing, shares in this champion investment trust are trading at a 12.8% discount to net asset value and help unlock further value from the portfolio, management is buying back shares to reduce the discount.
Emerging market play
Another investment trust I’d buy for my portfolio today is the JP Morgan Chinese Investment Trust (LSE: JMC).
Every investor should have some exposure to emerging markets in their portfolio as these regions are growing at a much faster clip than developed regions. Also, China specifically is becoming a world leader in technology, and the country’s tech firms have grown to become some of the most significant and most important in the world over the past decade.
JP Morgan China is well positioned to take advantage of these trends. Over the past five years, the trust has produced a total return for investors of a little over 100% thanks to its extensive exposure to Chinese tech stocks such as Tencent and Alibaba. These two holdings account for just under 20% of the portfolio.
The one downside of this investment is its high price. The total annual charge is around 1.4%, which is nearly three times more than the annual dividend of 0.5% offered to shareholders. Still, I believe that this is a this is a price worth paying to invest alongside experienced investors in one of the world’s fastest-growing economies.