Top 15 investment trusts of the past decade
Investment trusts have always enjoyed a rather volatile relationship with independent financial advisers and their clients but they have proved themselves to be more than capable of delivering solid returns over the past decade.
The stand-out performers have turned a £100 investment into more than £800, while many have achieved up to £500, according to Morningstar figures for the 10 years to the end of May, compiled by the Association of Investment Companies (AIC).
Here, we take a look at the best performing trusts over this period, as well as the top names in a variety of sectors, analyse the reasons why they have done so well and highlight some issues that investors need to consider.
Investment trusts are simply companies that are floated on the Stock Exchange. They are known as closed-ended vehicles, which means they will only ever have a set number of shares available to investors.
This enables managers to take longer-term views, on the basis they won't have to deal with lots of redemptions in troubled times. Trusts can also borrow money and are monitored by an independent board of directors looking after shareholders' interests.
Andy Gadd, head of research at Lighthouse Group, says they have a place in investors' portfolios. "They can be advantageous when you have more illiquid markets, due to the closed-ended nature of the investments," he says.
However, being listed also means the share prices are influenced by market sentiment as well as the performance of the underlying assets, and critics see these as some of the negatives of getting involved.
Martin Bamford, managing director of Informed Choice, rarely recommends investment trusts to clients. "Their discount/premium pricing, gearing and lack of availability on the main platforms we use often make them difficult to recommend," he says.
When he does recommend them, it's usually for the wealthiest clients who need greater diversification and are prepared to accept higher risks with an element of their overall investment portfolio. "Investment trusts tend to cover some of the more specialist investment sectors better, such as litigation and forestry, which our clients cannot access through open-ended funds," he says.
The best place to invest
For investment trust fans, there has only been one sector to be in over the past decade: biotechnology and healthcare. In fact, it has been the best performer over one, three, five and 10 years.
The managers attribute the success of this area to a combination of innovation within the industry, an ageing population, and mounting pressure on governments and insurers to find ways of delivering healthcare services to more people – often for less money.
It's a trend they expect to continue. Carl Harald Janson, lead manager of International Biotechnology Trust, believes the high demand for new medicines should mean investors receiving excellent returns over the short, medium and long term.
"Each year brings a scientific breakthrough, either through individual drug success stories or through the advances of new technology platforms such as gene therapy, cell therapies and gene editing," he says. "We are optimistic that the sector's performance will continue, not just for the next year but for the longer term."
The second best performer over the past year is the Asia Pacific specialist country sector, which is up 42%. This has performed strongly, as both the Indian and Chinese investment companies have performed so well in the past year with both markets bouncing back.
The Japan sector has also had a good year with gains of 40%, largely due to the belief that Japan's economic policies are beginning to work, according to Annabel Brodie-Smith, communications director at the AIC. "Mr Abe won the election last year and this has encouraged confidence that his Abenomic policies will continue," she says. "In addition, the oil price falling was positive for the Japanese economy."
Areas to avoid
At the other end of the performance table comes the specialist Commodities & Natural Resources sector, which is down a gloomy 11%. "This sector is out of favour and has struggled due to a dramatic sell-off of both iron ore and oil due to growth concerns about China affecting demand and oversupply," explains Brodie-Smith.
Only having done a bit better is Global Emerging Markets, though it has edged up 2%.
Its poor performance can be partly attributed to political uncertainty, particularly in Ukraine, which affected Russia and the Middle East.
THE BEST PERFORMING TRUSTS IN DIFFERENT SECTORS OVER THE PAST DECADE
BIOTECHNOLOGY & HEALTHCARE - BIOTECH GROWTH £847.75*
It seeks capital appreciation through investment in the worldwide biotechnology industry, with performance measured against its benchmark index, the NASDAQ Biotechnology Index (sterling adjusted).
Alan Brierley, a director at analyst Canaccord Genuity, points out that BioTech's manager, OrbiMed, has been in charge of the fund for 10 years. "To say this has been a transformational period would be an understatement," he says.
"Although secular growth is an overused phrase in the investment world, we believe that the biotech sector demonstrates such characteristics, while the manager highlights that valuations remain attractive."
* Note:Trusts are ranked in order of how a £100 investment has grown over a decade to end of May 2015.
UK SMALLER COMPANIES - STANDARD LIFE UK SMALLER COMPANIES £536.39
It aims to achieve long-term capital growth by investment in UK-quoted smaller companies – and in Harry Nimmo, it has one of the most respected and longstanding managers in this area, points out Martin Bamford at Informed Choice.
"His trust has been tipped for a narrower discount in the future, so investors could benefit from a share price boost in addition to the continued rise of smaller companies, which are generally performing strongly as the economy continues to recover," he says.
As Nimmo tends to focus on quality companies and avoid the riskier stocks, his trust can lag the sector when smaller companies perform strongly. But as a long-term holding, this is an investment trust that Bamford feels comfortable recommending.
ASIA PACIFIC - EX. JAPAN - SCOTTISH ORIENTAL SMALLER COMPANIES £493.15
It has been a solid performer but change is always unsettling and the trust is ending its long association with manager Angus Tulloch, one of the industry's star names. The new management of the trust by First State Stewart will be split into two autonomous investment teams.
Bamford doesn't advocate a knee-jerk response but suggests that investors should closely monitor the fund strategy and performance over the next year and then make appropriate decisions.
"The trust is currently trading at an attractive 10% discount, so investors prepared to take the long-term could benefit from investing now and holding throughout the transition to a new management arrangement," he says.
GLOBAL - LINDSELL TRAIN £476.22
The aim is to maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital. It invests in a range of assets, including equities, bonds, funds and cash.
ASIA PACIFIC - ABERDEEN NEW THAI £456.66
The objective is to provide shareholders with a high level of long-term, above-average capital growth through investment in Thailand.
EUROPE - JUPITER EUROPEAN OPPORTUNITIES £433.52
The aim is to invest in securities of European companies and in sectors or geographical areas considered to offer good prospects for capital growth, taking into account economic trends and business development.
UK ALL COMPANIES - SCHRODER UK MID CAP £424.11
The company's investment objective is to invest in Mid Cap equities with the aim of providing a total return in excess of the FTSE 250 (ex-Investment Companies) Index.
JAPAN - ABERDEEN JAPAN £359.41
It aims to achieve long-term capital growth principally through investment in listed Japanese companies, which are believed by the investment manager to have above-average prospects for growth.
PRIVATE EQUITY - NORTHERN INVESTORS COMPANY £343.46
Northern Investors Company PLC is a private equity investment trust managed by NVM Private Equity LLP.
EUROPEAN SMALLER COMPANIES - EUROPEAN ASSETS £338.24
It seeks to generate attractive long-term capital growth through investment in quoted small and medium-sized companies in Europe, excluding the UK. As well as capital growth, the company aims to offer an attractive dividend.
GLOBAL EMERGING MARKETS - TEMPLETON EMERGING MARKETS £324.56
The objective is to invest in companies based primarily in emerging markets or deriving a significant amount of revenue from emerging markets, with the aim of delivering capital growth to shareholders over the long term.
UK EQUITY INCOME - FINSBURY GROWTH & INCOME £321.23
To invest principally in the securities of UK quoted companies, although up to a maximum of 20% of the company's portfolio can be invested in quoted companies worldwide.
TECH MEDIA & TELECOMS - POLAR CAPITAL TECHNOLOGY £319.62
It aims to maximise long-term capital growth by investing in a diversified portfolio of technology companies from around the world.
GLOBAL EQUITY INCOME - MURRAY INTERNATIONAL £316.7
The objective is to achieve a total return greater than its benchmark by investing predominantly in equities worldwide.
NORTH AMERICA - JPMORGAN AMERICAN £281.06
The stated aim is to achieve capital growth from North American investments by outperformance of the company's benchmark.
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.
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.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
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.
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.
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).