10 investment trusts for beginners
UK Stock market income
The City of London investment trust is the trust your parents would want you to choose. It is a model of stability. Manager Job Curtis has been at the helm since 1991. His philosophy is to look for those companies which can provide steady, long-term growth, compounded over time, with no nasty surprises.
As a result, his portfolio reads like a roll call of the great and good in British business – Unilever, GlaxoSmithKline, HSBC, BP, and British American Tobacco. Mr Curtis invests with not only an eye to the potential returns from any holding, but also with a forensic analysis of any downside risks. It may not be exciting, but it is not designed to be; it is firmly positioned as a steady, dependable option for a turbulent world.
This does not translate into knock-out performance, but the trust has still beaten the FTSE All Share index over five years with a return of 83% versus 60%. Investors would expect the trust to do better than its peers at times of market turbulence; resilience over racy.
Another key selling point for the trust is that it has grown its dividends every year for the past 50 years. This is a key priority for Mr Curtis. “We focus on dividend sustainability and growth as well as capital growth,” he says. “We believe that’s an important anchor. This helps us to avoid the noise of the market.”
Finding companies with good cash generation is vital for Mr Curtis. This enables companies to pay their dividend and grow it over time. It’s not exciting, but the trust should be a steady ship in a turbulent world.
Nick Train has proved himself a worthy student to iconic investor Warren Buffett, on whose approach he has based his own.
Warren Buffett famously said: “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
Mr Train takes a similar approach, buying good companies and holding them indefinitely. He famously bought one new holding in 2015 (Remy Cointreau), declaring it to be the “first new holding in four years”.
Mr Train has run the trust since 2000, having founded the eponymous Lindsell Train investment company in the same year. He had grown disillusioned with the constraints of managing money within the larger investment houses and wanted to be free to invest where he wanted to invest, without an eye to the weightings within a benchmark, or what his peers were up to.
The Finsbury Growth & Income trust has three main ‘semi-permanent’ ideas. First, Mr Train likes consumer branded goods companies, such as Unilever and Diageo, which provide predictable cash flows and some protection against inflation. His second theme is media and software companies, such as Sage Group. He also likes financial services companies, including the London Stock Exchange and Hargreaves Lansdown.
Mr Train says: “There should be a reason for every holding and a live, current justification for the disposition of every penny of the capital entrusted to you.”
Gavin Haynes, investment director at Whitechurch Securities, says: “This trust has had a phenomenal run of performance. Nick Train’s focus has been looking for long-term winners with a competitive advantage that are in the forefront of their respective industries. These businesses have structural growth and are not reliant on the short-term performance of the economy. It has been a style of investing that has been much in vogue in the current difficult economic climate.”
UK Stock market growth
Neil Hermon is another example of a long-timer at the helm of an investment trust. At a time when manager turnover on investment funds is getting faster, he has been running the Henderson Smaller Companies trust for 14 years and has proved himself a capable steward, delivering a return of 169% for his investors over the past five years.
The trust is relatively large for a smaller companies fund at £475.48 million. This has seen Mr Hermon invest more in medium-sized companies than true ‘small’ companies, though he retains a 20% weighting in small and Aim-listed companies. Aim (formerly the Alternative Investment Market) is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market.
Mr Hermon and his compact team of two other fund managers, notch up around 400 meetings with companies per year. Within those companies, he is looking for capable management teams, a strong economic franchise, good cash flow and a company with momentum that is increasing its revenue reliably over time. When he finds them, he holds on to them, usually keeping them in his portfolio for at least five years.
For a smaller companies fund, the trust offers a reasonable income – 2.36% currently. Among its top holdings is NMC Health, the largest private healthcare provider in the United Arab Emirates, which is expanding into the long-term care market in Saudi Arabia. It also holds more domestic names, such as Paragon Group, one of the UK’s largest providers of mortgages and personal loans. These were hit hard by the recent Brexit vote, but Mr Hermon has been topping up in certain areas, such as housebuilders.
Global stock market growth
This is a thoroughly modern fund, wrapped in a cloak of traditionalism. Baillie Gifford, the investment group which manages the trust, has been around since 1908 and investment manager James Anderson has run the trust since 2000 But in spite of this old school pedigree Mr Anderson is looking for the winning companies of tomorrow, which has seen him invest in tech giants, such as Amazon and Facebook, and Tesla Motors.
Mr Haynes has been a long-term investor in the trust for his clients. He says: “The trust is focused on long-term growth businesses with the manager looking for long-term themes in the global economy. It is a truly global fund. It is a ‘conviction’ portfolio, with the manager willing to back his ideas and take big positions.”
It has been a strong, long-term performer, up 151% over the past five years. Given the nature of the underlying holdings, the trust is prone to bouts of volatility, but it has been consistently near the top of the AIC global sector over the long-term.
Mr Anderson has been well-supported on the trust by Tom Slater since 2009 and by Baillie Gifford’s ample analyst resources. The group prides itself on its collegiate approach and the longevity of its managers. At £4.2 billion in size, it also has considerable economies of scale, so the charges on the trust are low, with a management fee of just 0.3% per year.
The F&C Global Smaller Companies trust is one of only a handful of funds investing in smaller companies across the world. Managed by Peter Ewins since August 2005, the trust draws on other experience from around parent company BMO Global Asset Management (formerly F&C). Sam Cosh manages the European portfolio, for example, while Nish Patel manages the US portfolio. Mr Ewins manages the overall shape and allocation of the trust.
[The trust invests in in single companies and other investment funds. The largest weights in the portfolio are all other smaller company investment trusts – Eastspring Investments Japanese Smaller Companies, for example, or Manulife Global Asian Smaller Companies. For the most part, the trust sticks to mainstream markets, such as the US (at 42% of the portfolio), the UK (26%) and Continental Europe (11%).
Mr Ewins says: “Smaller companies generally offer stronger growth potential and are often run by dynamic individuals. Equally, they are not well researched. We invest in less well-known companies much lower down the size bracket. Large companies have lots of people looking at them and it’s more difficult to find bargains. We’re looking for the best companies around the world that can deliver growth in new and emerging segments of the economy.”
Unusually for a smaller companies trust, the trust has also paid a consistent and growing dividend. Although relatively low in absolute terms at just under 1%, the dividend has increased for 46 years in a row.
It is now more than a decade since Witan Investment Trust transformed itself from a rather stodgy global growth trust, managed exclusively by Henderson Global Investors, to a successful multi-manager fund.
Manager Andrew Bell says: “Managers’ fortunes tend to ebb and flow. We believe that if you invest in more than one, you can limit that ebb and flow. Also, we are a global fund and there is nothing to say that someone who is very good at investing in the Far East is any good at investing in the US. You need particular skills in particular geographies.”
Mr Bell meticulously scours the globe for the right managers. He has picked a range of managers that are focused stock pickers, agnostic on the index. He says: “We are blending relatively spicy ingredients in the hope of creating an interesting meal.” With that in mind, Witan’s underlying managers are generally not the well-known fund management names – they include Tweedy Browne, Matthews International or Marathon Asset Management.
The fund has about 40% invested in the UK and the remainder elsewhere. In general, Mr Bell leaves the geographic asset allocation to the underlying global managers, but he will act if he has strong conviction in a particular market, usually using derivatives such as equity index futuresto take exposure. A futures contract is an agreement between two parties for the sale of an asset at an agreed upon price.
Witan has a policy of growing its dividends and has delivered a higher payout every year since 1974. This remains a key priority for the trust’s managers.
Alexander Darwal has managed the Jupiter European Opportunities fund since 1999. Unusually for a European trust, the trust will invest in UK companies alongside European companies and the UK portion currently makes up around 27% of the portfolio.
Mr Darwall favours a concentrated portfolio, focusing on a handful of high quality businesses that are benefiting from long-term structural changes in the economy. This concentrated approach means that the trust has around 10% in its top holding – Syngenta – and the top 10 holdings make up more than 50% of the overall assets.
When selecting companies for the portfolio, Mr Darwall wants to find companies where the management team has a strong track record. Particularly important for him is their ability to deliver on their promises and work through problems. He also likes to see something that gives a company a sustainable competitive advantage. This might be proprietary technology, or other intellectual property.
Finally, Mr Darwall also looks to the wider macroeconomic environment to understand whether companies are in a sector likely to see long-term growth. He wants to ensure that companies have a tailwind to grow profits over the longer term.
This approach served him particularly well in the years after the financial crisis, when investors sought out those companies that could grow regardless of the economic environment. More recently, relative performance has weakened a little, but this is a trust for the longer term. It is up 147% over five years, outstripping the majority of its peer group and has been resilient even during periods of real strife in European markets.
Global stock market income
Murray International has given investors a bit of a scare in recent years. Aberdeen’s Bruce Stout, who manages the trust, had established himself as one of the top-performing global investors, but performance in recent years had been lacklustre. Principally, this was down to Mr Stout’s fondness for companies in emerging markets, which saw a significant slowdown in 2014 and 2015.
However, Mr Stout describes himself as a “natural contrarian”, and says that there will be times when his views are out of favour. This year the trust has been back with a vengeance and has resumed its place at the top of the performance tables. The weakness boosted the dividend yield, which now sits at 4.1%. Equally, it reduced the trust’s chunky premium, making it look better value for investors.
The portfolio still has a distinctly emerging market flavor: 28% is in Asia ex Japan equities, while another 25% is in emerging market equities. For Mr Stout, this is where the long-term growth in the global economy resides. However, in many cases these are companies with which investors will be familiar – Unilever Indonesia, for example.
Stout uses the ample resources from within Aberdeen Asset Management, calling on the company’s global 'buy' list, compiled by specialist analysts. He is also very much a proponent of the wider Aberdeen ‘buy-and-hold’ philosophy, looking to hold companies for the long term. The trust has an annual management charge of 0.5%.
This is the ultimate trust for people who like trusts – a whole portfolio full of them. F&C Managed Portfolio Income is managed by veteran investor Peter Hewitt, who has been with the group since 1983, working across a variety of management teams. He has managed this trust and its sister trust, F&C Managed Portfolio Growth, since 2008.
The trust is global in its remit, though with a natural bias to the UK (currently 44%) of the trust. Mr Hewitt invests in some familiar names, including City of London Investment trust and Murray International, but also some spicier options, such as Schroder Oriental Income fund. The trust usually holds about 25 underlying trusts.
The key on this trust is the income. The trust currently pays 4.4% with dividends paid quarterly. It targets a yield ahead of the FTSE All Share at all times. This focus on income could mean that the capital performance might lag, but in practice the capital value has been roughly in line with the FTSE All Share over time (66% versus 60% over five years).
The multi-manager structure makes the trust a little costlier than some of its peers, because the underlying managers will also levy a charge. The management fee is currently 0.65% and the total expense ratio is 1.4%.
The UK commercial property sector has been in the headlines for all the wrong reasons. Specifically, a number of funds have had to close to redemptions, so investors were effectively ‘stuck’, unable to sell out. As a closed-ended fund, the F&C Commercial Property trust has been largely immune from these problems and this has confirmed for many that commercial property is best-managed in an investment trust structure, which does not have the same liquidity constraints.
At £1billion, this trust is a big beast in the sector, but its underlying portfolio of properties is diverse and not confined to trophy buildings. For example, in London, it holds the glamorous Cassini House in SW1, but it also holds a retail park in Solihull and business parks in Aberdeen. The management on the trust has been stable, with Richard Kirby at the helm since 2005.
For investors looking for income, this is a good option. Not only is the yield high, at 4.7%, it helps investors diversify away from income from dividends and bond interest, potentially creating more stability. Nevertheless, the capital value has also outstripped the wider sector.
James Calder, research director at City Asset Management, has been buying the trust recently: “We looked at this fund after the Brexit vote and have been buying it ever since. It has a good management team and limited exposure to the London office space, which we have been negative on for some time – even before Brexit. It is very large, very liquid and this is important in the commercial property area.” The discount on the trust has widened since the Brexit vote, which may make it more appealing to new investors.
All returns are to 20 September 2016.
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 increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.
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).
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%.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
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.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.