Investment trust best buys: What Investment asks three investment trust specialists to recommend their favourite investment trust shares for a cautious, a balanced and an aggressive investment

Nick Sketch, investment trust analyst at Rensburg Sheppards, suggests that cautious investors would benefit from an investment with an element of capital protection. Harewood Energy & Base Metals 2 is structured fund launched in March 2006, so does not yet have a one-year track record.

"This is one of the new type of structured products that are ideal for investors who want some form of capital protection. It is a sub-fund of Harewood Structured Investments PCC Ltd, a Guernsey incorporated protected cell company, managed by Harewood Asset Management, the specialist structured fund subsidiary of French banking group BNP Paribas. This is an umbrella type which issues closed-end SIB-funds to meet specific objectives.

"This sub-fund is based on a basket of five commodities--30 per cent oil, 20 per cent aluminium, 20 per cent copper, 15 per cent nickel and 15 per cent zinc. Commodity prices will be volatile, so you some want some kind of guarantee to underpin it. The structure means you are getting either a minimum return of 1 [pounds sterling] if the value of the underlying commodities falls, or three times the return on the basket of commodities if it rises.

"Its real attraction is as an insurance policy against a big rise in inflation. It may or may not be exciting as a rifle-shot investment but is very useful for those who manage real portfolios and think about what can go wrong as well as what has gone right."

BALANCED OPTION

David Hambidge, investment director, pooled funds, at Premier Asset Management, feels that balanced investors should take advantage of the strong performance record of a small-cap fund. The shares of Aberforth Smaller Companies are ranked 14th out of 23 in the UK Smaller Companies sector over three years to 29 December 2006. They have returned 94.58 per cent over that period, compared to a sector average of 103.31 per cent.

"I think Aberforth Smaller Companies is a reasonable option for private investors. Its portfolio concentrates on the larger end of the small-cap universe, the bottom part of the FTSE 250 and the larger end of the Small Cap index. It doesn't get involved in AIM stocks at all, unlike many smaller company funds, so there is a degree of reassurance from a risk perspective, and there is currently no gearing.

"This has been one of the best performing smaller company investment trusts over the past five years, a period which takes in both bull and bear market conditions. The style of management is value and contrarian. So, for example, it is not in property companies at the moment, but is overweight in technology for the first time. They got out of property, having made money there, feeling that property companies are now overvalued on the back of the arrival of REITs. The discount is not screamingly cheap, but it is on fair value at 8.9 per cent. However, this means you are getting the same portfolio as the group's unit trust, but at almost a 9 per cent discount."

AGGRESSIVE OPTION

Mick Gilligan, director of fund research at stockbrokers Killik & Co, highlights the attractions of a sector specialist fund for more adventurous investors. The shares of Finsbury Emerging Biotechnology are ranked 2nd out of 3 in the Sector Specialist: Biotechnology & Life Sciences sector over three years to 29 December 2006. Over the period, they have returned 33.95 per cent, compared to a sector average of 44.45 per cent.

"I would choose Finsbury Emerging Biotechnology as an interesting option. Fundamentally, the case for this trust is that between 60 and 70 per cent of its portfolio is invested in smaller biotech stocks, with the balance in large caps within the Biotech sector. There are really two interlinked stories here. The first is that you are seeing improving earnings growth within the sector, as larger pharmaceutical companies are increasingly being forced to do deals with the smaller biotechs in order to maintain the flow of new patents.

"Secondly, as a consequence of this, you should see a continuing high level of M&A activity in the sector. The valuation case is very strong as well, if you look at these things at a price earnings growth level. This particular trust is currently trading on a discount of 5 per cent, but the board has undertaken to take action to ensure that it does not go above 6 per cent. So the discount is pretty well underpinned, and there is the prospect of strong growth."