Ian Cowie: mixed fortunes for the global trusts bought for my grandkids

Poorly performing stock market funds are bad enough to suffer on my own account but I feel even worse when it happens to either of my grandchildren, for whom I buy a few shares on their birthdays.

Sad to say, the last year has seen sharply diverging returns from the two global investment trusts I chose for these infants.

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My hope is that both funds will diminish risk by diversification in a dangerously unpredictable world and ensure exposure to growth and income, wherever they may arise.

First, the good news: the Association of Investment Companies (AIC) Global sector has delivered excellent returns of 25% over the last year, following sector averages of 41% over five years and 271% over the decade.

That’s ahead of the averages for all types of investment trust over the long and short terms, where the comparable numbers are 19%, 44% and 149%.

So, there’s nothing “boring” or underperforming about the Global sector, which continues to earn its place as the foundation of many portfolios and a one-stop-shop to own a share in wealth creation around the world.

Less happily, there are wide variations in recent returns from two of the biggest and longest-established investment trusts in this sector.

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To be specific, the £6.8 billion giant F&C Investment Trust Ord (LSE:FCIT) gave shareholders a 20% total return over the last year, while its £5.6 billion rival Alliance Witan Ord (LSE:ALW) lagged behind with 9.5%.

In a normal year, the latter number would be perfectly acceptable as it is higher than the long-term annual average from shares of all descriptions. But in this extraordinary year for equities it looks relatively feeble.

To make matters worse, ALW not only charges more for its services - with ongoing charges of 0.56%, compared to FCIT’s 0.45% - but its shares are also priced at a narrower discount to net asset value (NAV) - 4.9% below NAV, instead of 9.2% at FCIT.

So, why is my darling granddaughter, Cressida, paying more for less at ALW than her equally beloved brother, Charlie, at FCIT? Both these global giant funds have similar underlying holdings, with plenty of exposure to technology in general and the Magnificent Seven in particular.

For example, ALW’s top three holdings are the software giant Microsoft Corp (NASDAQ:MSFT), the online retailer Amazon.com Inc (NASDAQ:AMZN) and Alphabet Inc Class A (NASDAQ:GOOGL). These account for 4.5%, 2.1% and 1.9% of its portfolio respectively. Other holdings include the distiller and brewer Diageo (LSE:DGE), the self-descriptive Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) and the tobacco giant Philip Morris International Inc (NYSE:PM).

Meanwhile, FCIT’s top three listed holdings are NVIDIA Corp (NASDAQ:NVDA) with 5.3% of assets, Microsoft on 3.7% and Apple Inc (NASDAQ:AAPL) on 2.5%. The fund also has an allocation to private equity, or shares that are not listed on any stock market. Lower down the batting order, there is Meta Platforms Inc Class A (NASDAQ:META) and, once again, TSMC.

Evidently, FCIT’s bigger holding in Nvidia, the most valuable company in the world since its stock market capitalisation recently hit $5 trillion (£3.8 trillion), is proving beneficial, so is FCIT’s weighting to private equity. So, congratulations are in order to Paul Niven, FCIT’s fund manager since 2014.

By contrast, ALW’s multi-manager approach - which spreads responsibility across 11 different fund management companies, chosen by the corporate advisers Willis Towers Watson - did not justify its additional costs last year.

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As someone who loathes the tobacco racket, which kills more people each year than all the illegal drugs put together, I cannot resist arguing that ALW’s holding in PM, which makes Marlboro fags and various vapes, might be bad for shareholders’ wealth.

Against all that, both these funds have been in business for much more than a century - with FCIT founded in 1868 and ALW in 1888 - which is some comfort when aiming for long-term returns.

Both of them are also “dividend heroes”, having increased shareholders’ income every year for more than two decades. ALW has done so for 58 years, to currently yield just over 2%, while FCIT has 54 years’ increases to its credit and yields 1.3%.

So, I don’t intend to make any changes as a result of a single year’s surprisingly divergent returns. But I will suggest to my son and daughter-in-law that they consider evening out or balancing the children’s exposure to these two investment trusts.

Fortunately, there’s plenty of time to do so, as it will be 15 years before either child becomes an adult; Deo volente.

That’s just as well, since I recently discovered my granddaughter’s favourite word is “no”, although she is not yet two years old. It seems she is going to have a mind of her own and I don’t fancy having to explain why her fund did not grow as well as her brother’s.

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

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