In the 19th century a coterie of altruistic financiers gave small savers the chance to support exciting new enterprises.
By sharing costs, sufficient capital could be raised to compete with banks and multi-millionaires. The investment trust was born.
Each such company is quoted on the London Stock Exchange with a limited number of shares issued. This means the price is available every second of the trading day, unlike open-ended funds like unit trusts where it can take days to deal and frequently the investor has no idea of the final price.
Investment trusts have several other unique features over open-ended:
They often trade at a discount to net asset value, allowing purchases at very attractive prices;
They are able to borrow (termed ‘gearing’) to enhance returns;
They can withhold profits to even out dividend distribution.
Like other collectives, individuals invest in a range of underlying shares, thereby reducing risk and volatility. Although borrowing by a trust can be seen as raising risk, it offers the prospect of higher returns. Over the longer term, it has proved to be a rewarding investment tool and outperforms open-ended.
Comparing the cumulative performance over 10 years, trusts in the European sector (excluding UK) show 10.5 per cent growth to 10 per cent with open-ended and for European smaller companies 15 per cent to 13.6 per cent. Naturally stock picking is a factor.
Henderson European Focus has an emphasis on consumer goods and healthcare and is significantly located in Germany, Netherlands and Switzerland. It is favoured by Graham Spooner, investment analyst at The Share Centre.
Carolyn Black of Myddleton Croft says clients enjoy faster settlement times with trusts, potentially the day after a trade, by comparison with four working days with open-ended. Black tips Aurora for seeking “materially undervalued stocks to their intrinsic value” and, for yield, Twentyfour Income, which pays seven per cent with no conventional fixed income risk by holding floating rate debt.
For a large, experienced team whose trust pays six per cent through investing in subordinated debt, Justin Urquhart Stewart at 7IM suggests Axiom European Financial Debt.
Most investment trusts have boards of independent directors who appoint the managers and set their parameters. This is a useful tier to protect the interest of the shareholder. There are a few self-managed trusts including 3i in the private equity sector, British & American in the UK equity income field and Majestic and Witan in the global field.
The oldest investment trusts are Foreign & Colonial which was founded in 1868 when Queen Victoria was on the throne and Disraeli prime minister, Dunedin Income Growth and Scottish American in 1873, JP Morgan American in 1881 and Mercantile in 1884.
Mercantile is favoured by Spooner for aiming to increase dividends in line with inflation and achieve long-term capital growth through UK medium and smaller firms. The trust is also recommended by Jason Hollands of Tilney Investment.
Subject to legal limits, trust boards can decide how much money to be put into reserve to support future dividend payments. This means that in exceptionally lean years, savers can rely on a fair return. “As a result, there are a number of long-running investment trusts which have unrivalled track records of delivering year-on-year increases in dividend payments, irrespective of market conditions,” says Martin Payne, senior investment manager at Brewin Dolphin in Leeds. For that reason, he likes Finsbury Growth & Income and Temple Bar as core portfolio holdings.
The closed-end structure of trusts lends itself well to specialist areas and more illiquid sectors, notably commercial property, debt, infrastructure and private equity. In any downturn, managers can stay fully invested and do not have to dispose of precious holdings, as open-ended property funds had to after the EU referendum.
If seeking property, Black tips Stenprop which invests in UK multi-let industrial sites, trading on 25 per cent discount but paying six per cent with scope to grow.
Concentrate on performance rather than the charging structure. Standard Life Property Income, for instance, quotes a 3.53 per cent fee but its 10-year total return to the end of 2018 was an impressive 212 per cent – after charges.
For growth potential, Henderson Smaller Companies use a rigorous investment process including proven liquidity and is tipped by Adrian Lowcock at advisor Willis Owen. Tom Stevenson at Fidelity likes Aberdeen New India, which holds such major firms as HDFC Bank, Infosys and Tata Consultancy at an attractive discount.
Buying at a discount can amplify the underlying performance if the share price subsequently moves closer to the asset value. Stevenson is suspicious of very large discounts, saying his “sweet spot is between 10-15 per cent.” Having narrowed the search by discount, Stevenson looks for steady growth, favouring Herald with 280 holdings, many in non-tech companies.
Just as savers like to find a trust trading at a discount, a top performer may be worth paying a premium. Scottish Mortgage is usually at a premium but favoured by Kelly Kirby, Chartered Financial Planner at Chase de Vere in Leeds, for its “very experienced managers who adopt a high conviction approach with an impressive track record.”
Kirby also likes both Fidelity Special values where Alex Wright seeks out under-valued stocks and JP Morgan Emerging Markets as “one of the largest and best resourced emerging markets teams.” The latter, also favoured by Hollands and Spooner, has major holdings in Alibaba, Housing Development Finance, Taiwan Semiconductor and Tencent.
In the Far East, Jonathan Baker from Charles Stanley tips Scottish Oriental Smaller Companies, managed by First State, with a growth emphasis, such as Delta Electronics from Taiwan. Schroder Asia Pacific is Hollands’s tip for the region.
One tip is to select trusts run by well-informed, successful families: RIT Capital Partners, backed by the Rothschilds, and Caledonia, where the Cayzers have the controlling stake. Stevenson tips the latter.
TR Property with a mix of UK and European and nine per cent gearing is tipped by Payne, as well as Greencoat UK Wind and the Renewables Infrastructure, both of which yield over five per cent. He also likes Private Equity which is generally a difficult area to access given the long tie-in periods of a decade and high minimum investments. Further afield, BlackRock World Mining and Biotech Growth are selected by Baker. The former enables savers to gain BHP, Glencore and Rio Tinto – all crucial to urbanisation – at a discount. The latter, also discounted, backs therapeutic practices aimed at improving medical practice.
Finally, for a novel but potentially most exciting trust, Lowcock picks Personal Assets which has an unusual mix which works: large, established firms with repeat business, Government bonds, physical gold and gold mining shares and cash.