Taken on trust, the investment vehicle where risks are reduced
IMAGINE HAVING your savings invested in a range of companies but held in one fund to reduce risk and volatility, selected by a professional manager who is backed up by a team of researchers, whilst sharing the costs with other investors. This is the basis of investment trusts.
Each is quoted on the London Stock Exchange as a company in its own right and with an issued number of shares. Unlike openended funds like unit trusts which can expand or contract without notice, investment trusts have a known issue. Savers are usually looked after by an independent board of directors.
Such trusts have other distinct advantages over the open-ended. They can take a loan – known as ‘gearing’ – if a good opportunity arises and can place up to 15 per cent of profits aside every year. This means that in any downturn, they can continue to pay good returns and indeed some trusts have achieved decades of rising dividends.
Unlike unit trusts where it can take days before a purchase or sale is effected and the price not known, investment trust transactions are instant, meaning that savers are not disadvantaged if the market turns against them.
Despite an equity bull run for 10 years, stock markets are starting to slide, reflecting the US tariff wars. In such circumstances, it is vital to have investments managed and not be in a passive fund. Trackers have to buy everything in the index they are replicating. The collapse of the technology sector with stocks like Baltimore Technologies, Freeserve, Psion and Thus are examples of where tracker investors lost out.
Investment trusts were launched 150 years ago. Foreign & Colonial was the first, followed by Dunedin Income Growth and Scottish American who are 145 and 144 years old respectively. As many as 23 trusts have offered savings opportunities for over a century.
The oldest, now known as F&C, was set up to pool money for the investor of “moderate means”. It has paid a dividend to shareholders every year of its life and increased it for 47 consecutive years.
The closed-end structure means that trust managers do not have to dispose of stock or carry large cash balances to meet redemptions unlike their unit trust competitors.
A trust’s share price is determined not just by the value of its underlying assets but by supply and demand. This means it can be traded at a premium or discount to its net asset value (NAV).
Notably high premiums are paid for 3i Group, BlackRock Frontiers, RIT Capital Partners (effectively the Rothschild family vehicle), Sequoia Eco and Guernsey-registered John Laing Infrastructure. Conversely, hefty discounts are available with BlackRock Latin America, Dunedin Enterprise, JP Morgan Indian and Pershing Square.
“A major benefit of investment trusts is that they are usually quite cheap and so you can gain access to your chosen investment at relatively low cost,” advises Garry Ibison, chartered financial planner at Chase de Vere in Leeds.
However, he does warn that the use of gearing and the discount/premium issue, combined with specialist sectors or regions, mean that investment trusts are “usually riskier” than open-ended funds. His tips are Bankers, Scottish Mortgage and Witan.
Joel Dungate, investment analyst at Redmayne Bentley, says investment trusts can “provide much needed diversification into your portfolio”, accessing investments and geographies that would otherwise be very difficult to achieve directly.
He tips two: Scottish Mortgage, which is now in the top 100 quoted companies, and has major holdings in Amazon, Tencent and Alibaba, and Witan for long-term growth in income and capital using a multimanager approach.
Laith Khalaf, senior analyst at discount broker Hargreaves Lansdown, also likes Scottish Mortgage but additionally picks Edinburgh Investment for income seekers, with over half invested in larger UK companies, and Personal Assets for conservative savers as it seeks to preserve and increase – in that order – capital and tends to underperform when markets rise but is strong when they fall.
Investment trusts often have lower charges than other funds. City of London, Finsbury Growth & Income and Temple Bar are long running, consistent dividend payers that form core portfolio holdings at Brewin Dolphin, reveals Martin Payne, senior investment manager.
Payne says that trusts are attractive for access both to smaller companies – such as BlackRock Throgmorton which currently trades at a discount of over seven per cent – and for emerging markets, where he likes JP Morgan Emerging Markets which has a 12 per cent discount.
To achieve balance in a portfolio, it needs to have some of the speciality but more illiquid market sectors. This is where Payne says Brewin Dolphin is particularly favourable to investment trusts, notably to place money in infrastructure, private equity, debt and commercial property.
With the latter, open-ended funds during the credit crisis not only had to reduce their pricing basis but suspended dealings which prevented holders realising their investments for months. This scenario materialised again in the wake of the EU referendum but no such problems befell trusts.
Payne likes TR Property, which has a mix of UK and European holdings and just nine per cent exposure to direct property, and Standard Life Property Income which concentrates on industrial and office buildings with limited exposure to warehouse and prime retail.
For those seeking an environmentally-friendly trust and would like to support green energy, look at both Greencoat UK Wind and The Renewables Infrastructure Trust. Both pay attractive dividend yields around 5.5 per cent.
Individuals can struggle to access private equity with the long tie-in periods of a decade or more and high minimum investments.
First check that your pension fund does not already have sufficient exposure but otherwise look at a trust like HarbourVest Global Private Equity. Most private equity trusts trade on wide discounts to net assets, typically 18 per cent plus.
Looking at performance over five years and excluding expenses, the star sector has been global with Lindsell Train the top trust, returning a stellar 274.8 per cent.
As a sector, smaller companies have shown a winning streak: TR European Growth up 151.6 per cent, Baillie Gifford Shin Nippon 244.8 per cent, JP Morgan US Smaller Companies 105.1 per cent and Rights & Issues for the UK with 235.4 per cent. The only disappointment has been global smaller companies, such as Marwyn Value only producing 5.4 per cent.
Those looking for a good income stream, particularly in retirement, investment trusts have a great record. Over five years, Picton Property Income is up 130.5 per cent, Chelverton UK Dividend 107.8 per cent and for global equity income, the JP Morgan Global Growth & Income with 98 per cent.
On the downside, commodities and utilities have been sectors to avoid. Since mid 2013, the best performers have only achieved 9.9 per cent (BlackRock World Mining) and 29 per cent (Premier Global Infrastructure).