Interactive Investor

Ian Cowie: F&C IT is my long-term pick, but Alliance Trust looks tempting

Our columnist explains why global funds have plenty of appeal for beginner investors and when investing for younger family members in Junior ISAs. His long-term favourite is F&C Investment Trust, but Alliance Trust is piquing his interest.

14th March 2024 09:54

Ian Cowie from interactive investor

Which investment trust would you suggest for someone who wants to get started in the stock market but fears bad timing, or buying shares just before prices slump, after spectacular returns from technology stocks last year? It’s an awkward question for those of us who have survived a few crashes over the decades and I always give the same answer.

First, imagine how you will react when share prices fall, as they certainly will at some point. Visualising such a setback in advance could help you avoid doing something silly, like selling at the bottom and turning paper losses into real ones. If you need the security of a capital guarantee, stick with bank or building society cash deposits.

Second, if you are prepared to commit money for at least five years, then consider a global investment trust with a long track record of raising dividends, which might pay you to be patient and ride out the risks described above. Global funds diminish risk by diversification and dividend income can pay us to be patient during stock market shocks and help cope with the pain of capital destruction.

Fortunately, there are more than a dozen investment trusts in the Association of Investment Companies (AIC) Global sector and several of them feature in its venerable list of Dividend Heroes, or 20 funds which have increased shareholders’ income every year for at least 20 years without fail. This week, the AIC announced that 10 of them have bumped up their dividends every year for half a century or more.

No fewer than four of these top 10 Dividend Superheroes sit in the AIC’s Global sector, which is still trading at double-digit discounts to net asset values (NAVs). So, you can buy £1 of underlying assets for less than 90p.

The Fabulous Four for global diversification and at least 50 years of rising income are Bankers Ord (LSE:BNKR), founded in 1888 and which has 57 consecutive years of dividend increases; Alliance Trust Ord (LSE:ATST), also founded in 1888 and also with 57 years’ of rising payouts; F&C Investment Trust Ord (LSE:FCIT), founded in 1868 with 53 years of increasing income; and Brunner Ord (LSE:BUT), a relative newcomer, founded in 1927 with 52 years of pay rises for shareholders.

It is important to beware that the past is not necessarily a guide to the future, and dividends can be cut or cancelled without notice. However, it remains a remarkable historical fact that all these Fabulous Four” survived the Great Depression and both world wars.

Then all of them went on to increase investors’ income every year since Chuck Berry was making us chuckle with My Ding-a-Ling, Elton John was stomping through Crocodile Rock and David Bowie was blowing teenage minds with Starman. Sigh.

More recently, Alliance Trust has delivered the highest capital growth of these Fabulous Four and the most rapidly rising income. This £3.8 billion fund delivered total returns over the last year, five years and decade of 26%, 80% and 223% respectively. Dividends increased by an annual average of more than 13% over the last five years to give a current yield - or income expressed as a percentage of the share price - of 2.1%.

Looking under the bonnet, Alliance Trust’s top 10 underlying holdings are led by the software giant Microsoft Corp (NASDAQ:MSFT), followed by the online retailer Inc (NASDAQ:AMZN) and the credit card company Visa Inc Class A (NYSE:V). The red-hot chip stock NVIDIA Corp (NASDAQ:NVDA) also features, alongside the more esoteric Latin American e-tailer MercadoLibre Inc (NASDAQ:MELI).

Second among our Fab Four over the last year, Brunner’s £597 million assets delivered total returns of 21%, 88% and 197% over the same three periods, with income rising by an annual average of 4.6% to give a current yield of 1.8%. Microsoft is the top underlying holding, followed by Visa, with the chip-maker Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) also featuring.

Third, ranks £1.6 billion Bankers with total returns of 12%, 43% and 140%, plus income rising by 5.4% per annum to a current yield of 2.3%. Once again, the top holding is Microsoft, followed by the Irish-American information technology firm Accenture Class A (NYSE:ACN), and the digital giant Apple Inc (NASDAQ:AAPL).

Fourth out of four over the last year, stands £5.9 billion F&C Investment Trust, with total returns of 5.7%, 54% and 206%, with income rising by 6% per annum to yield 1.5% today. The top 10 underlying holdings are led by a private equity portfolio, followed by Microsoft and also include Nvidia and Apple.

No prizes for guessing which one of the above investment trusts I bought for my son, Joe, several decades ago and also for my grandson, Charlie, last year. But Joe did not complain when his modest stake in F&C Investment Trust played a small part in helping him buy his first house in London and, with luck, its performance will pick up before Charlie begins to scrutinise returns.

Most immediately, with our first granddaughter due in May, Alliance Trust looks tempting. But that could cause the wrong kind of sibling rivalry and awkward questions for grandfather.

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

Ian Cowie is a shareholder in Apple (AAPL) and Microsoft (MSFT) as part of a globally diversified portfolio of investment trusts and other shares.

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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