Investing for recovery | 3 Investment Trusts for recovery

While the world continues to battle with high inflation and interest rates, and the chorus of ‘recession is coming!’ grows ever louder, it’s difficult to see how an economic recovery is on anyone’s mind for the foreseeable.

Nevertheless, if there are signs that inflation is peaking, markets may start to anticipate better times ahead and begin to rally. In both the Global Financial Crisis and the COVID-19 pandemic, markets recovered significantly ahead of an improvement in the wider economy. For example, despite the 2008 crash - and in the midst of a deep recession - the FTSE 100 recovered 22.1% in the following year.

Across the pond, if you’d put £1,000 into the S&P 500 in December 2008 and waited until today to cash that in, it’d be worth over £4,454 (at the time of writing). So sometimes it pays to be prepared for the good times ahead even if you’re stuck in the bad times right now.

Of course, this strategy is best suited for longer-term investors, who are happy to sit tight and wait for a while – usually at least 5 years – before they can reap their profit. And as always when it comes to investing, it’s not guaranteed either, so perhaps not your thing if you’re looking for more certainty.

But if investing for economic recovery sounds like something you’re interested in, there are lots of Investment Trusts out there that can help you do it without having to do any of the number-crunching yourself – the fund managers will do it all for you!

Here are 3 Investment Trusts which experts rate for economic recovery. Scroll down to find out!

ICG Enterprise

James Calder, Chief Investment Officer at City Asset Management, suggests investors look at private equity if they want to take advantage of an economic recovery. He explains, “This is at the top end of our risk spectrum, but should perform well when risk is rewarded. My choice would be the ICG Enterprise Trust.”

The ICG Enterprise Trust focuses in ‘buyouts of businesses that are profitable, cash generative and have defensive growth characteristics’ that are best positioned to ‘deliver strong and resilient returns across economic cycles’. It prides itself on its ‘flexible mandate’, taking advantage of opportunities as they arise and spreading its investments across different types of assets that it expects to go up in value to maximise the chances of making a profit.

James Carthew, Head of Investment Company Research at QuotedData, also believes private equity could do better after a difficult year. He says, “The discounts to the net asset value of the underlying holdings have just got wider and wider. If people got slightly more comfortable that the net asset values were stable, these trusts could move a lot higher”.

The ICG Enterprise Trust’s portfolio is broken down into 52.1% high conviction investments (companies that ICG confidently expects to outperform the market) – including the likes of PetSmart and Minimax - and 47.9% third party fund investments (companies selected by 45 leading private equity managers) – such as EG Group and Leaf Home Solutions.

Aberforth Smaller Companies

Gavin Haynes, Investment Consultant at Fairview Investing, picks Aberforth Smaller Companies. This trust hunts in unloved areas of the market for valuable companies that have been overlooked. Haynes tells us, “Taking a contrarian approach can prove a good strategy to exploit recovery and there are few more unloved areas of markets than UK smaller companies with valuations at distressed levels.”

Established in 1990 and centred on the aim to deliver ‘superior long term investment returns', Aberforth Smaller Companies specialises in smaller UK-based companies. However, it doesn’t discriminate by sector, investing in everything from technology, telecommunications, healthcare, financials, real estate and consumer staples to industrials, basic materials and energy.

At its heart though, Aberforth follows a value investing strategy, buying shares in companies that it determines to be ‘selling below their intrinsic value’. It’s recognised by the AIC as one of the next generation of Dividend Heroes – an elite selection of trusts which have increased their annual dividends for more than 10 consecutive years.

In its November 2022 presentation to investors, Aberforth stated that ‘macro developments have been favourable to the value style’ and that there were ‘plentiful opportunities for the value investor, particularly in the UK’ in the months ahead. It forecasts ‘positive absolute returns over the next 3 years’.

Fidelity China Special Situations

Finally, if you’re looking to invest beyond British shores, Mark Preskett - Senior Portfolio Manager at Morningstar Investment Management – suggests the Fidelity China Special Situations trust. The UK’s largest China Investment Trust, it focuses on the long-term potential of China, which is widely-touted to become the next global superpower, and is also one of the AIC’s next generation of Dividend Heroes.

Capitalising on Fidelity’s large, Asia-based analyst team, the China Special Situations trust is designed to find ‘attractive opportunities in a market too big to ignore’. On its website, it acknowledges that 2022 was a tumultuous period for Chinese markets, but with many valuations at historic lows, the months and years ahead offer ‘compelling’ opportunities for investors.

Preskett says, “Our process is around assessing the fair value of hundreds of indices, geographics, and sectors. We will naturally gravitate to markets that have underperformed, which have the best prospects of higher future returns. China is, in our view, the cheapest country index out there. We know why – lockdowns, the common prosperity policy, which has hit the education, tech and property sectors - but it is possible to strong companies at low valuations. We have a dedicated Chinese equity position and have been overweight emerging markets for a while.”

In other words, Preskett suggests that China offers a unique opportunity to earn from a rebound in company valuations, assuming they regain lost ground this year. He points out that Morningstar are confident enough that this will happen that they’ve been proportionately favouring China and other emerging markets in anticipation.

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