The 10 trusts profiled below are members of Moneywise’s First 50 Funds for beginners – and make good starting points for an investment portfolio. To find out more about investment trusts and how they work read the our guide: Understanding investment trusts.
UK STOCK MARKET INCOME
Income remains the priority for many investors, whether they need dividends to help fund their living expenses or because these regular cash payments are reinvested to bolster returns.
Equity income strategies focus on companies that pay a dividend to shareholders rather than reinvesting all their profits in the company. Companies that pay a dividend tend to be more established and stable and therefore an equity income strategy will often prove more defensive in falling markets, though may lag a rapidly rising market.
Investors looking for regular income have long favoured home-grown companies. Some UK equity income investment trusts, such as City of London, have increased the income they pay to investors every year for several decades.
Investors in equity income trusts can also benefit from an income account facility that can smooth return distributions through the good times and the bad. This is because investment trusts can hold back 15% of income to boost returns at a later date.
Investment trusts are certainly worth considering by income seekers, but they don’t come with any guarantees. As with any investment, your money is exposed to a degree of risk, so it’s important not to invest anything you can’t afford to lose.
City of London Investment Trust (CTY)
AIC sector: UK Equity IncomeObjective: To provide long-term growth in income and capital by mainly investing in UK listed equities.Ongoing charge: 0.43%Yield: 4%
City of London has a formidable reputation as an income-producing investment trust, with 50 years of consecutive annual dividend increases under its belt.
It is one of the largest UK equity income trusts and has one of the lowest annual ongoing charges. Job Curtis has run the trust since 1991. He manages it conservatively, focusing on high-yielding, cash-generative businesses. It may not be exciting, but it is not designed to be; it is firmly positioned as a steady, dependable option in a turbulent world.
Mr Curtis looks for companies that are undervalued on a medium-term basis that he can invest in over the long term. He likes to run his winners and the portfolio turnover is low. It is well-diversified with more than 100 holdings.
Around two thirds of the portfolio is invested in big ‘blue-chip’ companies listed on the London Stock Exchange, but they tend to be businesses operating globally that are selling their goods and services overseas and investing in economies likely to grow faster than the UK.
Finsbury Growth & Income (FGT)
AIC sector: UK Equity IncomeObjective: To achieve capital and income growth and to provide shareholders with a total return in excess of that of the FTSE All-Share Index.Ongoing charge: 0.74%Yield: 2%
The fund manager of Finsbury Growth & Income, Nick Train, bases his investment approach on iconic investor Warren Buffett’s philosophy.
Warren Buffett famously said: “When we own portfolios of outstanding businesses with outstanding managements, our favourite holding period is for ever.”
Mr Train aims to buy good companies listed on the London Stock Exchange and hold them indefinitely.
A big theme in his investment philosophy is consumer branded goods companies, such as Unilever and Diageo (his top holdings in the portfolio), which provide predictable cash flows and some protection against inflation.
He runs a concentrated portfolio of around 30 stocks, which is much fewer than other fund managers, and his long-term approach means that turnover is extremely low. He doesn’t buy very often – when he bought Remy Cointreau in 2015, it was his first new holding in four years. His most recent purchase is Manchester United (MANU) football club in September, buying a block of shares directly from majority owners, the Glazer family. He does not take general economic and political developments into account as he says they eventually wash through.
UK STOCK MARKET GROWTH
Small companies, which are often dynamic firms, have the potential to outperform larger companies over the long term. However, small companies can also be more volatile than larger companies and tend to fall further and faster when markets go down and investors shun risk.
Investing in smaller companies funds is more suitable for higher-risk growth investors who want the potential of better returns and are willing to accept greater levels of volatility and potentially significant short-term losses in order to achieve this.
UK smaller companies have fallen out of favour due to Brexit concerns and this has seen widening discounts, which has hurt price performance. However, it could provide an attractive entry point for long-term investors.
Henderson Smaller Companies (HSL)
AIC sector: UK smaller companiesObjective: To maximise shareholder’s total returns by investing in smaller companies that are quoted in the UK.Ongoing charge: 1.01%Yield: 2.2%
Managed by Neil Hermon since 2002, Henderson Smaller Companies has since regularly outperformed its benchmark, the Numis Smaller Companies index.
The trust is relatively large for a smaller companies fund. This has seen Mr Hermon invest more in medium-sized companies than true ‘small companies’ – medium-sized companies typically account for around two thirds of the portfolio, while small companies (including Aim-listed stocks) make up the remainder.
Mr Hermon’s main focus is on looking for growth stocks at the right price. He finds his investments mainly by conducting hundreds of meetings with companies each year, where he assesses company managers and their strategy. He looks for ‘the four Ms’: model (a strong business model); management (managers with a good track record); money (strong balance sheets and cash flow); and momentum (good earnings momentum).
He takes a long-term investment approach, holding stocks for over five years on average, so he looks for companies that can grow over that period. Unusual for a smaller companies fund, the trust offers a reasonable income.
GLOBAL STOCK MARKET GROWTH
The global sector is ideal for long-term buy and hold investments. However, trusts can differ significantly in terms of their geographical spread and their investment approach and so investors need to fully understand where they are investing.
Scottish Mortgage (SMT)
AIC sector: Global
Objective: To maximise total return from a portfolio of long-term investments chosen on a global basis, while also generating dividend growth.Ongoing charge: 0.44%Yield: 0.7%
Scottish Mortgage is a thoroughly modern investment trust. James Anderson has run the trust since 2000 with Tom Slater becoming his co-manager in 2014.
The managers look for inspirationally managed companies with strong competitive advantages and radical growth opportunities. Mr Anderson has been a long-term believer in the power of technology, which is transforming an ever-wider range of industries – from cars and healthcare to media and retail. This search for the winning companies of tomorrow has seen him invest in tech giants, such as Amazon and Facebook, and Tesla Motors.
Mr Anderson has also been keen to capitalise on China’s emergence as an economic powerhouse. Despite the wider problems recently affecting the Chinese economy, he expects the big three Chinese internet companies (Baidu, Tencent, and Alibaba), which are among the trust’s top 10 holdings, to continue to grow regardless.
He is fiercely committed to a long-term, high-conviction approach and the trust’s portfolio contains only around 70 holdings. Companies are bought on a minimum five-year view.
F&C Global Smaller Companies (FCS)
AIC sector: GlobalObjective: To achieve high total return by investing in smallercompanies worldwide.Ongoing charge: 0.61%Yield: 0.9%
F&C Global Smaller Companies is one of only a handful of funds that specialise in investing in smaller companies around the globe. Managed by Peter Ewins since 2005, it is the largest specialist global smaller companies investment trust.
The trust invests in single companies and other investment funds and is highly diversified with nearly 200 holdings. Mr Ewins decides the trust’s overall allocation strategy and manages its UK portfolio, while F&C’s other smaller company specialist managers are responsible for North America and continental Europe.
He also selects external managers to gain exposure to companies in areas where F&C lacks its own smaller company investment management resources, such as Africa, Asia, Japan, and Latin America.
In fact, the biggest holdings are other smaller company investment trusts. Although most of the trust’s returns come from capital growth and it has a yield of under 1%, it has nevertheless built up an impressive 47-year record of annual dividend increases.
Witan Investment Trust (WTAN)
AIC sector: GlobalObjective: To achieve long-term growth in income and capital through active multi-manager investment in global equities.Ongoing charge: 0.79%Yield: 1.8%
Founded in 1909, Witan is one of the investment trust industry’s ‘dividend heroes’. Although its yield is relatively modest at less than 2%, it has clocked up 42 consecutive years of annual dividend increases.
Most of its portfolio is managed by 10 to 15 external fund managers running different geographical portfolios. When it first adopted this ‘multi-manager’ approach in 2004, there was a heavy allocation to index-tracking funds and this resulted in mediocre performance.
Since the arrival of chief executive Andrew Bell in 2010, its capital performance has also improved significantly. Under Mr Bell, who decides the asset allocation and chooses the external managers, the trust has become actively managed. The blend of different active approaches and styles is aimed at improving returns and helping to smooth out the volatility normally associated with a single manager. Mr Bell meticulously scours the globe for the right managers; generally focused stockpickers and not the well-known fund management names. He says: “We are blending relatively spicy ingredients in the hope of creating an interesting meal.”
GLOBAL STOCK MARKET INCOME
As corporate governance has improved across the globe and more companies have started to pay dividends, UK investors have been able to look to new markets for these income-generative companies. This has led to the expansion of global equity income strategies. These can seek out the best dividend-paying companies around the globe.
Murray International (MYI)
AIC sector: Global equity incomeObjective: To achieve a total return greater than its benchmark by investing predominantly in equities worldwide.Ongoing charge: 0.68%Yield: 3.8%
Murray International was founded in 1907. Since 2004, it has been managed by Bruce Stout, who has an impressive track record and described himself as a “natural contrarian”. He explains: “Contrarian investing conjures images of people who buy deeply out-of-favour industries because they want to do the opposite of everyone else, and we do not do that.
“But what we do want to do in the contrarian sense is to buy things that everyone is selling. This is because if everyone is selling and there aren’t enough buyers, you’ll probably get the company at a cheap price.”
Mr Stout focuses on defensive businesses where he has a high degree of confidence that the companies will be able to continue to deliver earnings and dividends, and not paying too high a price for their shares. When selecting investments, he is not so much interested in the countries where companies are based, as in the type of business they undertake and the defensive nature of what they can deliver.
EUROPEAN STOCK MARKET GROWTH
While we often hear doom and gloom stories about the economic prospects within Europe, it should be remembered that the region is home to many good-quality companies that make consistent profits.
Those managers investing in larger companies can benefit from firms which have significant earnings outside of Europe, while those investing in smaller companies have the opportunity to find businesses which have been overlooked or under-appreciated.
Jupiter European Opportunities (JEO)
AIC sector: EuropeObjective: To invest in the securities of European companies and in sectors or geographical areas which offer good prospects for capital growth, taking into account economic trends and business development.Ongoing charge: 1.88%Yield: 0.9%
Alexander Darwall has managed this fund since 1999. He can invest anywhere across Europe including in the UK. He favours a concentrated portfolio and the top 10 holdings typically account for over half of the trust.
When looking for shares to buy, Mr Darwall seeks to identify companies that enjoy certain key business characteristics. The first is a strong management record and team, with the ability to explain and account for its actions. The second is proprietary technology and other factors that indicate a sustainable competitive advantage.
The third is the reasonable expectation that demand for their products or services will enjoy long-term growth. The fourth is an understanding that structural changes are likely to benefit, rather than negatively impact, that company’s prospects.
He regards change and disruption as necessary ingredients for his investment strategy to work. He points out that in virtually every case of disruption, there is a ‘silver lining’ – a company that can profit from others’ discomfort.
Many commercial property investments were hit following the fallout from the EU referendum vote, but they have largely bounced back well. This asset class can offer a consistent income stream and is ideal for diversifying investment portfolios away from shares and fixed interest. Commercial property investment trusts hold a portfolio of properties in the retail, industrial and office sectors, in order to benefit from capital growth and income from rents.
F&C Commercial Property Trust (FCPT)
AIC sector: Property Direct – UKObjective: To provide an attractive level of income with potential for capital and income growth through investing in a diversified UK commercial property portfolio.Ongoing charge: 1.07%Yield: 4.1%
This trust is the largest in the direct property investment trust sector and has one of the most experienced management teams, led by Richard Kirby. It has a strong performance record and is attractive for income investors with an annual yield of over 4%, paid monthly.
The trust’s investment policy contains various limits on how the portfolio is managed, which helps to maintain diversification and reduce risk.
For example, no single property can account for more than 15% of gross assets at the time of acquisition, and the largest five properties must be no more than 40% of gross assets. There are also limits on the proportion of the portfolio in different sectors such as offices, retail, and industrial property.
Though it is overweight in central London, it has limited exposure to City of London offices, which are seen as most vulnerable to the impact of Brexit.
Picton Property Income (PCTN)
AIC sector: Property Direct – UKObjective: To provide shareholders with an attractive level of income together with the potential for capital growth, by principally investing in commercial property sectors.Ongoing charge: 2.47%Yield: 4.1%
Picton Property Income’s portfolio consists of 58 assets invested across the main commercial property sectors: Office, Industrial, Retail, Retail Warehouse and Leisure. The portfolio is predominantly invested in the office and industrial sectors and is biased towards London and the South East.
Under chief executive Michael Morris, the team has generated Picton’s outperformance by actively managing its assets, thereby enabling it to raise rents, cut costs and reduce voids.
Picton Property Income invests in assets where it believes there are opportunities to enhance either income or value, and this is primarily achieved by providing space that meets occupiers’ requirements.
The portfolio has around 350 occupiers providing a diversified income stream from a wide range of businesses. The majority of this income is paid out to investors in the form of quarterly dividends.
The top five holdings for each trust is the most up to date information as at 19 October 2017.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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