Trusts could be the star of your portfolio
Cash in by backing Sage of Omaha and The Beatles
Anumber of investment trusts have come to the market in recent weeks. These include the successful launch of Home, which will invest in homeless accommodation, mentioned here earlier this month.
It is to be followed by other launches, including the buffettology Smaller Companies Trust – inspired by the investing philosophy of star uS fund manager Warren buffett ( picturedtopright), who is known as the Sage of Omaha.
The search is on, it seems, for undervalued british companies.
new issues create a stir, but once the initial excitement is over, most trusts will go to a discount, which may be the better time to buy.
Subscribing to a new issue makes more sense if it is in a niche sector, which is why Home’s mix of yield and social purpose was appealing. but there is a growing realisation that investment trusts, sometimes seen as old-fashioned, can be a good deal in 2020.
Why are they back in vogue? The dividend drought and the misdeeds of disgraced fund manager neil Woodford head the list.
Investment trusts – stock market-quoted companies in their own right that own shares and other assets – can dig into reserves to provide income. This is good news, given concern about pandemic dividend cuts. but investment trusts, many of which were established in the 19th century, embody other victorian values such as the importance of thinking long- term.
Woodford filled his fund with unlisted holdings which are difficult to sell at speed. but, within an investment trust, stakes can have time to prosper.
In City jargon, an investment trust is closed-ended, meaning it has a fixed number of shares, so the managers are not forced to stage a fire sale of the underlying assets when people want their money back. Instead, investors simply sell shares in the trust.
This contrasts with managers of embattled open- ended funds, where units are created and dissolved when investors buy and sell. When a lot of people want out, assets may have to be sold in a hurry, or, as with Woodford, the fund may be frozen.
Savers in his fund are still waiting for some of their cash, 18 months after the scandal broke. Thousands more have been trapped in gated commercial property funds. Currently, the managers of investment trusts are custodians of £ 210bn of the nation’s savings. Another advantage is that their activities are overseen by independent boards who are not afraid to act.
Should you be thinking of adding your savings? Yes, if you need to improve your income. City of London, which has a 5.7pc yield and JP morgan Claverhouse (5.2pc) are two cited by numis analyst ewan Lovett-Turner.
Yet, despite their reserves, no equity income trust can remain immune to the chilly dividend climate. Troy Income and Growth, which has a 3.8pc yield, is set to cut its dividend next year. but it pledges to continue to provide an income that is ‘sustainable’.
Investment trusts also offer the chance to put money into a wider range of assets than plain vanilla shares. Hg Capital, a private equity trust, backs companies that provide software to firms who need better technology to thrive.
Greencoat uK Wind supports renewable energy. The soon-tobe-launched round Hill music royalty will own rights to some hits of The beatles ( picturedtop left) and The rolling Stones, and offers a 4.5pc yield.
A significant disadvantage of the investment trust is the chance that it will fall to a discount – that is when its shares are worth less than the value of its assets. James Carthew of Quoted Data, the analytics group, argues that discounts should be seen in another way:
‘When excitement builds up about a trust, it goes to a premium. The discount serves as a pressure valve – it can also be a way to make money.’ So if you buy at a discount, you have purchased assets for less than they are worth, so stand a chance of profiting.
For those with a taste for adventure, Carthew highlights Henderson Opportunities, a uK tech trust at a 19.7pc discount, with a yield of 3pc. Interactive Investor likes F&C, where the discount is 9.9pc. baillie Gifford uK Growth, on a discount of 4.7pc and with a yield of 3.2pc, is less intimidating.
At present, baillie Gifford is the most- talked about manager, thanks to Scottish mortgage, which backs unquoted firms with daring and success (a reason why I’m a holder) and the lower-key monks which has a global remit.
monks was one of the three trusts named when I asked experts what they would buy if restricted to just one. ben Yearsley of Shore Financial Planning selects Personal Assets whose mix of gold, government bonds and shares aims to protect wealth.
Jason Hollands of bestinvest picks rIT Capital Partners, which was known as rothschild Investment Trust, and members of this dynasty remain as shareholders and hold places on the board. ben newell of Investec contends that ‘skin in the game’ aligns the interests of managers and investors.