Whether you are a building a nest egg for a child or grandchild or saving for your own future, an investment trust could be right for you. We’ve picked this year’s winners, focusing on trusts that perform consistently well.
An investment trust can be a great way of accessing a diversified portfolio of shares, managed by an expert, at low cost.
Unlike conventional open-ended funds, investment trusts are able to use ‘gearing’; that is, they are able to borrow money to invest. Although this ability is not without risk, it can substantially boost returns in rising markets and reward long-term investors.
Likewise, the fact they can hold back 15% of their dividends during strong years to smooth returns over time means they can be a sensible alternative to open-ended funds for those investors who want a rising income from their investments.
But, just as with funds, the choices can be baffling, with trusts investing in shares, property, debt, private equity and cash. Some trusts focus on the UK, while others invest globally or in specific geographic regions or themes.
This is where the Moneywise Investment Trust Awards can help. We’ve teamed up with data provider Morningstar and a panel of expert judges to hand-pick the best investment trusts across a range of popular sectors. We haven’t just selected those trusts that have performed well over the past year or so, rather we have highlighted those that have proved they can perform consistently well and have the resources in place to carry on doing a good job for their investors.
UK All Companies
“UK equity funds were widely shunned by investors last year, largely down to current political uncertainties and gloomy forecasts for the domestic economy,” says Jason Hollands, judge and managing director at online investment service Best Invest and at Tilney wealth management group.
“Despite this, trusts delivered sound returns, especially those with high exposure to mid-cap stocks. If the UK economy continues to defy economist’s forecasts and a sensible future accommodation on trade is reached with the EU, UK equities could well turn out to be a wild-card performer.”
Our judges’ stand-out trust is Fidelity Special Values, which takes the award for the second year on the bounce.
David Holder, judge and senior analyst at investment research firm Morningstar, says: “Manager Alex Wright has been running this well-defined strategy for over five years and has produced good results. This is truly an all-cap fund, with a significant allocation to small caps and mid caps relative to the FTSE All-Share Index, something that clearly plays to Mr Wright’s strengths.”
The runner-up this year is the Mercantile Investment Trust.
“Mercantile is a UK equity trust with a difference,” says Mr Hollands. “It specifically invests outside the FTSE 100 to focus on medium- and smaller- sized companies. Managers Martin Hudson and Guy Anderson of JP Morgan each run half of the portfolio, which together leads to a highly diversified portfolio of over 120 holdings.”
UK Equity and Bond Income
This is a very small sector, but it can be a useful one for those investors seeking a mix of equities and bonds and who do not want to look overseas for that exposure.
Taking the award this year is the Acorn Income Fund. However, as its performance suggests (145% over five years), investors should not regard this as a low-risk option. Bonds are not a major constituent of the fund, and its impressive returns have been driven by riskier stocks.
Mr Hollands explains: “Acorn Income provides access to a hybrid portfolio of UK equities and bonds, with the equity portfolio currently representing 80% of assets. This is managed by the boutique fund group Unicorn Asset Management, which has a particular expertise in smaller companies investing and this is reflected in the underlying portfolio. The fixed-income (bond) assets are managed by Premier Asset Management.”
Henderson High Income, which has been the winner for the past two years, is highly commended this time around and offers more diversified equity exposure with investments in well-known and smaller companies.
Dzmitry Lipski, investment analyst at platform Interactive Investor (Moneywise’s parent company), says: “The trust has been managed by David Smith since July 2015 and supported by head of equities Alex Crooke, part of the experienced global equity-income team at Henderson.
“The trust aims to provide a high income from a diversified portfolio of predominantly well-known UK and smaller-cap companies, but also from bonds if desired. Typically, over the longer term, they have 80% in equities and 20% in bonds and can move this allocation depending on the manager’s view on an economic cycle position.
The manager invests in companies with robust balance sheets and low debt that can sustain growing dividends. The trust has a dividend yield of 5%, and the payout grew on average by almost 3% over the past five years.
“It has delivered strong returns over the longer term with higher-than-average yield, earning a reputation as a ‘steady Eddie’ of the sector. The flexibility to switch between bonds and equities is the reason the trust performed better than its peers during market downturns as it was able to allocate far higher amounts to bonds, which in turn attracted investors in search of the added security this offered. It’s worth knowing that last year Threadneedle UK Select Trust was merged into the Henderson High Income Trust. Under the terms of the merger, Threadneedle Trust was reconstructed and wound up, while shareholders had the option to receive either cash distributions or roll over into Henderson Trust.”
UK Equity Income
With returns on savings and gilt yields remaining low, equity income is an obvious choice for people who need to generate an income from their investments.
However, the sector can be a good choice for growth-focused investors too, as Mr Hollands explains: “The UK remains unrivalled among global equity markets for yield, with a long-standing emphasis on dividends. In fact, nearly all of the real return from UK equities over the long term has come from dividends and dividend reinvestment, so investment in equity income trusts makes a great cornerstone component of a portfolio.”
Both winning and highly commended funds in this category seek to offer investors the best of both worlds. Our winner – for the eighth consecutive year – is Finsbury Growth and Income**.
Mr Hollands says: “In common with other portfolios Nick Train manages, it pursues a long-term ‘buy and hold’ investment approach to backing a concentrated portfolio of around 40 high-quality companies. Consumer brands are the major theme of the portfolio with sizeable positions in the likes of Guinness owner Diageo and Unilever, whose vast range of brands spans tea, detergents and ice cream. It also holds Burberry, Heineken and Cadbury’s owner Mondelez.”
However, Mr Connolly points out that as it’s a growth-oriented trust, its yield will not be as high as its peers in the sector.
Our runner-up is Lowland, managed by James Henderson since 1990, which also tempts investors with growth and income.
Mr Holder says: “The approach is not simply to focus upon the income component of the portfolio but to aggressively grow the capital, as a larger base should allow for significant dividend growth. The preferred area of investment is small companies, but it also holds larger companies to balance this bias.”
UK Smaller Companies
Mr Lipski says: “Small-cap equities have strongly outperformed large-cap equities since the financial crisis. This outperformance is mainly attributed to the fact that smaller equities are typically under-researched, under-invested and less efficient than the market for large caps.”
However, while he thinks the sector could yield superior returns over the long term, Brexit negotiations and our imminent departure from the EU do pose a risk in the near term. As such, potential investors should not be swayed too heavily by impressive returns and must take heed of the inherent risks associated with the sector.
For the third year in a row, the judges picked Henderson Smaller Companies**.
“This is an unconstrained stock-picking fund, which is run by an experienced manager in Neil Hermon, who has been at the helm for 15 years,” explains Mr Connolly. “This is a high-risk sector, especially with a smooth running of the Brexit process far from assured, but stock market volatility can also create opportunities for good-quality managers such as Mr Hermon.”
BlackRock Smaller Companies takes the highly commended prize for the second consecutive year.
Mr Lipski says: “This trust has been run by the highly experienced UK smaller companies manager, Mike Prentis, since 2002. He invests in smaller companies able to deliver sustained growth with good-quality management. Returns since 2002 have been excellent, with substantial outperformance of the index and its peers.”
Property Direct UK
“This is an eclectic sector encompassing specialist trusts focused on student accommodation to logistics and healthcare,” says Mr Holder.
As such, he suggests Moneywise readers get exposure to property in the first instance, using less niche trusts with a broader exposure to UK physical commercial property. Our winning trust is Picton Property Income**, which invests across a range of different property types.
Mr Lipski says: “The trust aims to provide an attractive level of income together with the potential for capital growth over the longer term. It owns a property portfolio in the south of England, consisting of 52 assets across the main commercial property sectors: office, industrial, retail, retail warehouse and leisure. Its performance has picked up impressively since it became a self-managed trust and changed its name in 2012 under new chief executive Michael Morris.”
Coming a close second is last year’s winner Standard Life Investments Property Income.
Mr Connolly says: “This is a diversified ‘bricks and mortar’ property fund from an experienced and well-resourced management team. It is a core diversified holding paying an attractive income and investing across industrial, office, warehouse and retail property. It should continue to provide consistent returns.”
“These are halcyon days for global trusts, which have once again risen to prominence as ‘one-stop shop’ choices for smaller savers,” remarks Mr Hollands. “But it is those trusts taking a stock picking and unconstrained approach, rather than traditional asset allocation-driven portfolios, that have led the way.”
Competition was very tight in this category, which features a number of longstanding and very successful trusts, with the award going to the Monks Investment Trust (which is run by Baillie Gifford) for the first time.
Mr Holder says: “Charles Plowden and his deputies Malcolm MacColl and Spencer Adair, have managed this fund since March 2015 with a process honed since 2005. They attempt to identify companies that generate above-average earnings growth focusing on companies with competitive advantages and superior business models. In addition, fees are competitive.”
Scottish Mortgage**, which won the category last year, takes second place.
Commenting on the trust, which was launched in 1909, Mr Holder says: “While the name might conjure up the image of a conservative and traditional approach to investing, Scottish Mortgage is, in reality, a gung-ho investment portfolio, with a totally unconstrained ‘go anywhere’ approach to investing that is focused on high-growth companies from the US to China. Top holdings include Chinese internet giants Alibaba, Tencent and Baidu as well as pioneering US life science firm Illumina. The trust also has a sizeable holding in electric car manufacturer Tesla.”
Global Emerging Markets
An investment in a global emerging markets trust will get you exposure to regions including China, India, and Latin America. These markets are undoubtedly higher risk than their more developed counterparts, but for the long-term investor, Mr Hollands says they should not be overlooked.
“At a time when valuations looked stretched in many asset classes and part of the equity markets, global emerging markets shares are one notable pocket of value, trading below their long-term trend.”
He adds: “These export and trade-sensitive markets should also benefit strongly from the improved pace of global growth and so global emerging markets should be high on the radar as a potential area to invest in during 2018.”
Our winner for the second year in a row is JP Morgan Emerging Markets.
Mr Connolly says: “This fund benefits from one of the largest and best resourced emerging markets investment teams and is about as close as you are likely to get to a ‘sleep at night’ trust investing in this sector. It adopts a strong stock-picking process, which starts by asking the question: ‘Is this a business we want to own?’”
He’s also a fan of our runner-up, BlackRock Frontiers, but warns the nature of the countries it invests in – which are at an earlier stage of economic development – mean it’s not for the faint-hearted.
“This is the top-performing trust in the sector. However, it’s high risk and volatile, investing in frontier markets such as Argentina, Kuwait and Vietnam, where regulation, transparency and corporate governance is likely to be much lower than in the developed world. This trust has performed well, though investors can always expect a very bumpy ride.”
“Europe has returned to favour with many investors over the past year as the clouds of electoral anxieties have abated to a considerable degree. Growth has also picked up on the continent leading to a healthy pattern in earnings upgrades,” says Mr Hollands. However, there are headwinds. “In my view, European Central Bank policy is unnecessarily too accommodative and will need to tighten. Another key concern is the strength of the Euro, which threatens export competitiveness,” he adds.
There were two standout trusts in this category. Our winner is last year’s runner-up, Jupiter European Opportunities**.
Mr Connolly says: “Manager Alexander Darwall, who has been running this fund since 2000, is recognised as one of the premier European fund managers. His approach of investing in ‘world-beating companies’ that control their own destinies has resulted in a record of consistent outperformance. This trust remains an excellent choice for those who want exposure to good quality European companies.”
Coming in a very close second place is last year’s winner, Henderson Euro Trust.
Mr Lipski, says: “The trust is run by Tim Stevenson, who is considered one of the most experienced investors in European equities. He has proved himself as a highly skilled stock-picker – mainly in quality-growth companies held for the long term. As a result, the manager has achieved an outstanding long-term performance record on the fund, outperforming the benchmark 20 out of 25 years since its inception in 1992.”
Asia Pacific Ex Japan
“This is a potentially high-growth region where investors can achieve spectacular returns,” says Mr Connolly. “But this usually comes with a high degree of risk. Investors need to be wary that they don’t duplicate exposure if they are investing in Asia alongside emerging markets trusts, particularly as both may have their largest weighting in China.”
Our award this year goes to Schroder Asia Pacific. Commenting on the trust, Mr Holder says: “Matthew Dobbs is a skilled and experienced investor, who has been running money since 1981, managing money since 1985 and this trust since launch in 1995. Mr Dobbs focuses on company fundamentals, rather than trying to make macro calls. And he can leverage off the substantial regional resource that Schroders has.”
Taking second place is Pacific Horizon. Mr Connolly says: “This is a genuine stock-picking trust, managed by Baillie Gifford, which has a strong and consistent long-term track record. The flexible approach adopted means that performance can be significantly different from the benchmark, although this has often worked in the favour of investors. This makes it an ideal choice for long-term regular premium investments.”
North America and North American Smaller Companies
Mr Lipski says: “While US equities have delivered strong returns since the 2009 lows, continued economic and earnings growth mean US equities remain attractive to keep owning. Meanwhile, there is still hope of US fiscal policies, such as corporate tax cuts, which are likely to provide a substantial boost to corporate earnings.”
Our winner here is last year’s runner-up, JP Morgan American. Mr Holder says: “JP Morgan American is a sound choice for core US equity exposure. Fund manager Garrett Fish has been in charge here since 2002. He draws upon the extensive wider fund manager and analyst resource available to him at JP Morgan, using both fundamental analysis from the US equity team and outputs from the behavioural finance unit when picking stocks. Mr Fish looks for high-quality growth stocks and focuses heavily on cash flow and its deployment when assessing a company.”
JP Morgan’s US Smaller Companies investment trust is our runner-up in this category. Mr Hollands is a fan of the trust, which differs from many in the sector.
“UK-based investors typically choose to access the US market through funds or trusts that focus on very large companies in the S&P 500 Index or through the prism of a global equity fund exposed to US-domiciled global players. JP Morgan US Smaller Companies Investment Trust offers something very different as it invests in micro-cap companies, which are typically in the $80 to $500 million size range,” he says.
“This provides investors with much greater exposure to US domestic facing stocks than more commonly held US funds and might therefore be considered by investors who want to participate in the strong US economic expansion which is under way, which should be further boosted by tax cuts, infrastructure spending, and rising wages.”
Investment trust group of the year
JP Morgan knocks Henderson off the top spot this year, after scooping up awards in Global Emerging Markets and North America & North American Smaller Companies, as well as being shortlisted in five categories.
Commenting on our winner, Mr Connolly says of the group: “JP Morgan is a very well-resourced investment company, with strength in a wide range of areas, and it is committed to its investment trust products.
“Its track records are usually based on consistency, rather than ‘flash in the pan’ performance, so they should be well-placed to continue to perform well for investors in the future.”
* Source: Morningstar, as at 5 February 2018. All other data from Theaic.co.uk, 14 March 2018
** Denotes a Moneywise First 50 Fund member. For more information, visit Moneywise.co.uk/first-50-funds.
This year, our awards looked at 10 sectors: Asia Pacific Ex Japan, Europe, Global, Global Emerging Markets, North America & North American Smaller Companies, Property Direct UK, UK All Companies, UK Equity and Bond Income, UK Equity Income, and UK Smaller Companies.
Morningstar provided us with performance data over three, five and seven years (to 31 December 2017). Trusts were ranked on market return performance over three years. We aggregated performance over each period to calculate the top trusts in each sector. This helped us create shortlists of the top performing trusts which were sent to our panel of judges.
We asked our judges to vote for their top three judges in each sector taking into account suitability for Moneywise readers, risk, manager ability, investment strategy, consistency, prospects and pricing, as well as performance.
The shortlist for investment trust group of the year was based on the number of appearances each group made in the sector shortlists. Our judges then voted for their top two.
Patrick Connolly, certified financial planner at IFA Chase de Vere
David Holder, senior analyst manager research at Morningstar
Jason Hollands, managing director at Best Invest (online investment service) and Tilney (wealth management group)
Dzmitry Lipski, investment analyst at Interactive Investor (Moneywise’s parent company)