Ian Cowie: the trusts giving investors what they really, really want

Preparing for tomorrow’s 30th anniversary of an epoch-defining event prompted me to wonder which investment trusts delivered the highest total returns over what could reasonably be regarded as a shareholding lifetime. 

Wage slaves might work for 40 years but few of us had cash to spare in that first decade before stock market investment paved the way to financial freedom.

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Here and now, several long-term top-performing trusts continue to be priced at double-digit discounts to their net asset values (NAVs) and could prove to be bargains for buyers today. Perhaps “value”, not “variety” is the spice of life.

So, leaving you to guess about that “epoch-defining event” until later, here are the top 10 investment trusts since 1996 according to Morningstar. 

Sad to say, I only own shares in one of them and failed to buy it soon enough to make the most of its long-term compounding magic.

More importantly, analysis by Association of Investment Companies (AIC) research director Nick Britton shows that the average return across all investment trusts that traded throughout these three decades shows they easily beat inflation and preserved the real value or purchasing power of investors’ cash. 

To do so, the Bank of England reckons we needed to turn £1,000 in June 1996 into £2,065 today.

By contrast, the top-performing fund over those 30 years was Allianz Technology Trust Ord (LSE:ATT), which transformed an initial investment of £1,000 into an eye-stretching £66,053. 

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Despite such sustained strong performance, shares in this £2.8 billion fund continue to trade around 8% below their NAV. My favourite tech trust, Polar Capital Technology Ord (LSE:PCT), didn’t launch until December 1996, so fails the 30-year remit.

Ranking second overall, HgCapital Trust Ord (LSE:HGT) demonstrated long-term capital growth from private equity - or assets that are not listed on any stock exchange - with a total return from the same £1,000 starting point of £47,338. 

HGT remains priced 29% below its NAV after actually shrinking shareholders’ capital by 17% over the last year. Enthusiasts argue that this might be a buying opportunity.

Third came 3i Group Ord (LSE:III), another giant of the private equity sector, which turned £1,000 into £45,964. 

Even total assets of £31 billion are not enough to allay worries about the valuation of unlisted assets, although an encouraging trading update caused the share price to pop nearly 9% higher on Thursday morning.

Fourth is closest to my wallet, the “forever fund” holding Scottish Mortgage Ord (LSE:SMT), which turned the usual starting investment into £41,200. If only I had been there 30 years ago! 

As discussed here recently, a fifth of this £19.1 billion global fund is invested in Space Exploration Technologies Corp Class A (NASDAQ:SPCX), Elon Musk’s extraterrestrial conglomerate. 

But amid all that excitement, SMT shares actually trade on a discount of around 9%.

Fifth out of all closed-end funds, Aberdeen Asia Focus PLC (LSE:AAS) finished the period with a total value of £40,017. This smaller companies specialist, focused on the Far East, consistently delivered capital growth but remains priced 11% below NAV.

Sixth, and closer to home, the UK smaller companies trust, Rights & Issues Investment Trust Ord (LSE:RIII) ended the period with a value of £33,874. Despite such massive capital growth, plus a running dividend yield of 2%, RII continues to change hands at a 19% discount.

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In seventh place stands another smaller companies specialist, albeit overseas on the Continent, JPMorgan European Discovery Ord (LSE:JEDT), which achieved an end value of £32,434. Its dividend yield of 2.4% helped squeeze the discount down to 8.7%.

Eighth-ranked Fidelity European Trust Ord (LSE:FEV), focused on bigger continental companies, ended the period with £31,204. 

Underlying holdings are led by ASML Holding NV (EURONEXT:ASML), the Dutch business that makes the machines that make microchips, followed by the Swiss pharmaceutical giant Roche Holding AG Ordinary Shares new (SIX:ROP), and the French firm Schneider Electric SE (EURONEXT:SU). Dividend income of 2.3% trims FEV’s discount to around 5%.

In ninth there’s Pacific Horizon Ord (LSE:PHI), which generated a total return of £30,767 from Asia excluding Japan. 

Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), followed by South Korea’s Samsung Electronics Co Ltd DR (LSE:SMSN) and China’s Tencent Holdings Ltd (SEHK:700), are the top three underlying holdings. Dividends are negligible at 0.2% but a 10% discount might tempt bargain-hunters.

Finally, Fidelity Special Values Ord (LSE:FSV), the UK All Companies blue chip, props up our top 10 trusts over the last three decades. 

Its dividend yield of 2.25%, rising by an annualised average of 12% over the last five years, means FSV trades near to par at a discount of less than 1%.

Britton, of the AIC, told me: “Investment trusts are built to compound returns over time. Their structure lends itself to long-term thinking, giving boards and managers the scope to extend the time horizon of their investment strategies – including the modest use of gearing to boost returns.

“The average trust has turned £1,000 into £16,700 over three decades, equivalent to an annual return of 9.8%.”

By contrast, the Bank of England reckons annual returns of only 2.42% were needed to keep pace with inflation since June 1996. 

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How important income and indexation are depends on each individual investor’s objectives or, in plain English, what you want or, perhaps, what you really, really want.

For anyone still wondering which “epoch-defining event” occurred 30 years ago tomorrow on 26 June, it was - of course - the release of the Spice Girls’ debut single Wannabe. Ring any bells?

So, tell me what you want, what you really, really want. I’ll tell you what I want, what I really, really want. 

Long-term capital growth with rising income will do for me. Slam your money down and wind it all around; slam your money down and wind it all around!

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

Ian Cowie is a shareholder in Scottish Mortgage Investment Trust (SMT) as part of a globally diversified portfolio of investment trusts and other shares.