These are all pooled together, allowing a retail investor to simply buy the stock and get exposure to everything owned by the trust. Here are three that I think are underrated at the moment.

Access to private firms

First up is the abrdn Private Equity Opportunities Trust (LSE:APEO). The trust has fallen in value by 2% over the past year, but is up a very respectable 33% over the past three years. It also pays out a dividend, with the yield at 3.59%.

I believe this is an underrated trust because of what it allows retail investors access to. As the name suggests, abrdn as the manager uses the money to buy stakes in privately listed companies. It also puts money in private equity funds, which usually have a high minimum investment amount.

Given the barriers for a regular person like myself to directly invest in private companies, the trust is a great way to get exposure here. There are some strong businesses that aren’t listed on the stock market.

A risk is that it can be hard to sell a stake in a private company. This is because there is no open market to do so.

Tapping into knowledge

Another trust on my radar is the JPMorgan US Smaller Companies Investment Trust (LSE:JUSC). The stock is down 5% over the past year, but up 23% over the past three years.

I feel confident in picking large-cap US stocks, including those large tech names that are popular here in the UK. However, do I have the knowledge and expertise to pick US small-cap shares? Not at all.

Yet I do believe there’s value in this part of corporate America. So that’s why I feel the fund is underrated, in that it serves a really important area of the stock market. An investor can buy the trust and get access to the fund managers that have between 16-26 years’ experience in this sector.

Of course, investing in small-cap stocks is difficult and carries with it a higher level of risk and that should be acknowledged.

A hedge fund for anyone

The last trust is Pershing Square Holdings (LSE:PSH). The stock is listed on the FTSE 100, yet I feel it’s underrated as not many appreciate the value it can add to a portfolio.

Pershing Square is a hedge fund run by Bill Ackman who is well known for his views on certain stocks. Normally, someone would need a large amount of cash to get access to a hedge fund. Very few are listed on the stock market, let alone the size of Pershing Square.

This presents a unique opportunity for investors to get involved. The expertise involved in the fund and the type of financial instruments used to generate profit are beyond most of us.

The trust is up 7% over the past year, however it always has the potential to offer high returns due to the aggressive strategies it has. On the other had, this is the main risk. Large losses are possible and have happened in the past!

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Powerhouse economies

Each trust is focused on a powerhouse economy — indeed, the two biggest economies in the world. China’s growth rate has slowed recently, as it transitions away from decades of colossal infrastructure investment towards consumption. However, an IMF forecast of 6.2% growth for 2019 is still impressive. The US doesn’t come near this, but its forecast growth of 2.5% still outstrips developed markets in the West, like the UK (1.5%).

The scale and growth of the US and Chinese economies provides a favourable backdrop for our investment trust managers to root out dynamic growth businesses.

Focus

As you can see from the breakdown of their portfolios in the table below, both trusts are tilted towards investing in companies with market capitalisations of less than £5bn.

Smaller companies generally have higher growth potential. Furthermore, in the case of the US and China, they have huge domestic markets to expand in. For example, a JPMorgan trust holding, Eastgroup Properties, is focused on developing and acquiring distribution facilities across the US ‘sunbelt’ states.

As I mentioned earlier, China’s economy is shifting towards domestic consumption, with the numbers and spending power of its middle class increasing rapidly. The Fidelity trust is very much focused on products and services that cater for this growth within the country. China MeiDong Auto, for example, is a car dealership, handling the likes of Lexus, BMW and Porsche.

Of course, there are companies in both trusts that aren’t focused solely on their domestic markets. But a good many are, or largely are, and with plenty of growth to go for on home soil, I’m not too concerned by Donald Trump’s trade war with Beijing.

Mis-priced quality companies

Another thing the two trusts have in common is that they lean towards businesses with strong management teams and competitive advantages that are profitable and cash-generative. You’ll find little, if anything, in the way of speculative (‘blue-sky’) companies — oil explorers, biotechs and so on — in their portfolios.

I like the trusts’ focus on quality businesses and their bias to smaller companies, which are less well-researched and lead to greater opportunities for mis-pricing. Furthermore, the management teams of both trusts have delivered returns above the average of their sector peers.

Performance

Over the last 10 years, the JPMorgan trust has posted a net asset value (NAV) total return of 430% versus a North American Smaller Companies sector return of 312%. Over five years the numbers are 93% versus 84%.

The Fidelity trust hasn’t been around long enough to notch up a 10-year record. Over five years, it’s delivered a NAV total return of 106% versus an Asia Pacific sector return of 99%.

I think both trusts have a lot going for them, and that they could serve growth investors well in 2019 and beyond.

The post My top 2 ‘growth’ investment trusts for 2019 appeared first on The Twelfth Magpie.