Ian Cowie: the case for defence and how to play the sector

Britain is “underprepared and under attack” according to Lord George Robertson, a former Nato secretary-general and Labour defence secretary. But John Healy, the current defence secretary, says investors can help pay for our protection.

Lord Robertson blasted a “corrosive complacency” towards military spending and added: “We are not safe. Britain’s national security and safety is in peril.”

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However, Healy, who is struggling to overcome Treasury opposition to increase defence spending, said: “In the face of rising global threats, we need public and private together, investors, industry innovators, and my message is this: invest in defence and send a strong signal to adversaries that would do us harm.”

Fortunately, several investment trusts offer substantial exposure to defence-related businesses, ranging from BAE Systems (LSE:BA.) to Rolls-Royce Holdings (LSE:RR.), among others. Better still, these funds automatically diversify to diminish risk and provide professional asset selection in this specialist sector.

Nick Britton, research director of the Association of Investment Companies (AIC), drilled down into their data to identify which trusts’ underlying holdings offer exposure to the rearmament boom. He told me: “We’re living in turbulent times and since the start of hostilities in Ukraine, we’ve seen greater readiness among investors to consider companies that make weapons as potential investments.

“For example, while 68% of private investors said that they exclude weapons companies from their portfolios or try to avoid them in 2021, that number fell to 51% in 2025.

“Several investment trusts offer exposure to defence companies. The most widely held company is BAE Systems, held by 10 different investment trusts, followed by Paris-headquartered Safran SA (EURONEXT:SAF), which is held by seven trusts.

“Rolls-Royce and Chemring Group (LSE:CHG) are each held by six trusts. Many of these companies do more than defence, of course, with other activities including civilian aviation, shipping and power generation.”

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European Opportunities Trust (LSE:EOT) leads the group on this analysis, with 8.6% of its net asset value (NAV) invested in defence stocks, including its top 10 holding in Dassault Systemes SE (EURONEXT:DSY), the French aerospace technology group.

BlackRock Greater Europe Ord (LSE:BRGE) stands second with 8.3% of its NAV in armament shares, led by Safran, the French defence specialist.

Neither EOT nor BRGE pay much in the way of dividends, unlike the third trust in this sub-group, CT UK High Income Ord (LSE:CHI), with 7% of its money in defence, a split-capital fund run by Columbia Threadneedle, where the ordinary shares (CHI) and the ‘B’ shares (CT UK High Income B Share Ord (LSE:CHIB)) yield 5% and 5.3% respectively. Shareholders’ income increased by an annual average of 2.4% over the last five years, according to independent statisticians Morningstar.

Fourth in this group stands JPMorgan Claverhouse Ord (LSE:JCH), where 6.2% of NAV is defence-related, including the top 10 holding Rolls-Royce, and the yield is 4%, rising by an annual average of 4.2% on the same basis as above.

After that, defence exposure declines to 4.7% of NAV at Global Opportunities Trust Ord (LSE:GOT), where Dassault Aviation is a top 10 holding; then 4.5% of NAV at BlackRock Income and Growth Ord (LSE:BRIG) and 4% of NAV at City of London Ord (LSE:CTY) where BAE is the fourth-biggest holding.

Better still, CTY is a dividend hero, having increased shareholders’ pay for an eye-stretching 59 years without fail. Here and now, this fund - managed by Job Curtis since 1991 - is yielding 3.8% rising by 2.3% per annum.

As you might expect, total returns from the above funds vary widely. But none has flown so high recently as the tiny specialist, Seraphim Space Investment Trust Ord (LSE:SSIT), where the shares have soared by an eye-stretching 271% this year.

More than three-quarters of Seraphim’s NAV is invested in defence-related space technology - such as surveillance satellites - and two-thirds of the total is based in Europe, including the United Kingdom.

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Regular readers may recall that I paid 53p per Seraphim share last March, as reported here at that time. They were trading at 182p on Thursday and are now my third-most valuable holding.

This fund pays no income at all but its capital growth strategy is currently shooting the lights out. As I have pointed out before, it has gone up like a rocket and could come down like a stick.

Even so, with no evidence of the European re-armament boom ending any time soon, it might pay investors to shoot first and ask questions later.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in BAE and Seraphim Space Investment Trust (SSIT) as part of a globally diversified portfolio of investment trusts and other shares.