Sensible ideas to invest a £50,000 windfall
Some consistent themes emerged: for example, there are evidently some self-styled contrarians among us. But it's also striking how diverse the selection is. It will be interesting to see how our fantasies have fared in a year's time.
LONG-TERM CORE HOLDINGS
Schroder Oriental Income (£30,000)
The Far East ex Japan has been out of favour for a couple of years, yet many of the countries in the region have comparatively low borrowings, increasingly diversified economies and good demographics - and share prices are now on much less demanding valuations than those in the West.
Schroder Oriental Income's experienced manager, Matthew Dobbs, is strongly supported by Schroders' regionally based research analysts. The trust's net asset value (NAV) returns have been comfortably ahead of the MSCI AC Pacific ex Japan index, and it currently yields more than 4%. Moreover, the shares are not on a demanding premium.
Scottish Mortgage IT (£25,000)
Managed by James Anderson at Scottish partnership Baillie Gifford, Scottish Mortgage Investment Trust aims to generate a return ahead of the FT World Index over a five-year rolling period.
It has comfortably achieved that over the past five years, with a return of 226% in share price terms, more than twice that of the index; over 10 years, the share price has returned 314% against the index's 132%. It's also cheap, with an annual management charge of 0.32%. The discount is a relatively low 3.6%.
Invesco Perpetual Income (£25,000)
My sensible investment is Invesco Perpetual Income. Anyone who thinks that is not so sensible now that star manager Neil Woodford has departed has not looked at the impressive record of his replacement, Mark Barnett. Since Barnett took over Invesco Perpetual's UK Strategic fund in 2006, its performance has been significantly better than that of IP Income.
One reason is the wider mandate of UK Strategic, which has enabled him to hold more high-performing small-cap stocks. But Barnett has been running money for more than two decades, mostly at Invesco, and his performance has been exemplary throughout. Moreover, Woodford's record in part reflects the team approach of Invesco's equities division.
Personal Assets IT (£35,000)
Sometimes, a run of poor performance can be an opportunity to pick up a great manager at lower cost. As a lower-risk investment, the Personal Assets investment trust fits the bill. Manager Sebastian Lyon is a thoughtful, conviction-driven manager.
However, 2013 saw him positioned too bearishly with a heavy weighting to gold and low weightings to equities. As a result he is now fourth quartile over the past 12 months and this could be a good time to buy into the trust. Personal Assets has a capital preservation mandate, and this mindset could serve investors well in the next 12 months.
Fundsmith Equity (£35,000)
Launched in 2010 by City of London legend Terry Smith, Fundsmith Equity has returned 64.2% as at 1 May.
Smith follows a strict set of investment principles, which boil down to making long-term investments in attractively valued, large global companies with specific characteristics. Businesses must be able to sustain a high return on operating capital; not need significant leverage to generate those returns; have a high degree of certainty of growth from reinvestment of cash flows; and be resilient to changing business conditions and innovation.
The fund currently has just 25 holdings, mainly in the consumer staples and healthcare sectors. It is the largest holding in my personal pension, and requires little monitoring.
Unicorn Mastertrust (£30,000)
The tiny Unicorn Mastertrust has more than tripled to £17 million of assets under management in the past year. Manager Peter Walls runs a diverse portfolio comprising around 45 investment trusts, with Acorn Income, TR Property and Templeton Emerging Markets among its top 10 holdings.
He aims to spread the fund across both geographies and asset classes, and then adjusts allocations in the light of changes to discounts, gearing, new issues and volatility. The double layer of charges is a disincentive, but as Walls observes: "the investment trust sector lends itself well to managers adding value through expertise and understanding."
The fund has ranked consistently within the top decile of the 200-strong IMA flexible investment sector over one, three and five years.
British Empire Securities IT (£35,000)
My solid investment choice is Asset Value Investors' British Empire Securities & General Trust. British Empire has taken a battering and is a bottom-quartile performer over one, three and five years. However, the trust has been enjoying a turnaround in fortune of late, as its inherent value style is coming back into fashion.
Over the year to date the fund has returned 2.1% compared to a loss of 0.27% for its sector, IT Global. Its holdings include French telecoms firm Vivendi which has benefited from a pick-up in corporate activity. At a discount of more than 13%, it represents a value opportunity in a sector with narrowing discounts.
Camellia is a worldwide conglomerate, the owner of many agricultural, engineering and distribution businesses and a private bank. Its history goes back centuries, and its strategy at least to 1991, when the then chairman pledged it to the continuous refinement and improvement of its businesses for the long term.
By saving money in the good times and investing consistently through thick and thin, Camellia has, over the past two decades, derived stability and profit from the cyclical markets it serves.
Its majority shareholder is a charitable trust, its executives receive no performance-related bonuses, and it has a large cash surplus. A share price of £100 values the equity at nearly £275 million, almost £100 million less than the company's net assets - a discount of 25%.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.