If you’re in it for the long haul, well-managed investment trusts based on solid, market-leading businesses can deliver excellent returns
Investment trusts are one of the oldest investment vehicles, public limited companies that are celebrating their 150th anniversary this year.
The closed-ended structure of these trusts (there are a fixed number of shares, no more can be issued after the initial offering and they can be traded on the stock exchange) is a key benefit, allowing managers to hold on to stocks from drinks manufacturers to engineering companies to airport operators for long periods of time.
Because of the fixed number of shares, unlike their open-ended (OEIC) fund counterparts, the managers of these vehicles are not under pressure to act on investor inflows and outflows.
Investment trust managers, therefore, have the option to hold on to their favoured stocks for longer, as there is less pressure to sell investments at short notice if the investors suddenly fall out of favour with the asset class and want to withdraw their money.
Of the Moneywise First 50 Funds for beginner investors’ 10 investment trusts, 70% have been around for more than 90 years. Three of these investment companies – Finsbury Growth & Income Trust, Murray International Trust and Scottish Mortgage Investment Trust – highlight some of their longest-held stocks and the benefits of a closed-ended structure when investing over the long term.
“Their closed-ended structure is a key benefit”
Bruce Stout, manager of Murray International Trust since 2004, suggests today’s world of commerce and finance might be unrecognisable to the founders of the Scottish Western Investment Company, now Murray International, when they established the company in 1907 with an initial share capital of £500,000 (it now has total assets of £1.65 billion).
But, he points out, the investment philosophy of the trust, which focuses on global income, has “never wavered during more than a century of constantly changing and often extremely challenging times”.
Data from the investment trust trade body, the Association of Investment Companies (AIC), shows the trust has delivered a share price total return of 924.67% for the 25 years to 31 March 2018.
Mr Stout says: “Steel and railways in North and South America represented the vanguard of progress at the beginning of the 20th century, and the original investment portfolio had a predominately transatlantic bias, with a heavy emphasis on the bonds and preference stocks of railroad and tramway companies.
“Fast-forward 100 years, and while the engines of growth may have changed, the investment spirit to seek out value in emerging markets remains as vibrant as ever.”
The trust currently holds almost a fifth (17%) of its assets in Latin America and emerging market equities, and a further 25% is invested in Asia Pacific ex Japan equities, according to the AIC.
Mr Stout adds: “Current holdings such as Grupo Asur, Unilever Indonesia and Taiwan Semiconductor have been held in our portfolio for over 10 years. We continue to do so in the belief that there are still significant growth opportunities ahead.”
Grupo Asur, for example, which is the second-largest holding in the portfolio, operates airports in Mexico, and, through its presence in popular resorts such as Cancun and Cozumel, benefits from the continuing rise in visitors to Mexico. It is therefore well positioned to experience stronger growth as the global leisure industry continues to expand.
Meanwhile, Catharine Flood, client service director for Scottish Mortgage Investment Trust, which invests in global companies with radical growth opportunities, says its longest holding is the Swedish industrial company Atlas Copco, which has been in the portfolio since 1995.
She explains: “The company is one of Europe’s highest-quality engineering groups. Its flagship segments are its industrial compressors and vacuum businesses and it also possesses leading positions in industrial tools and in construction and mining equipment. Atlas Copco has an excellent record of generating returns, backed by strong cashflow generation and cost controls.”
“Scottish Mortgage recorded a total return over 25 years of 1,759.56%”
As a result, the stock has been a strong contributor to the performance of the trust, generating 18% on an annualised basis to the end of February 2018. For the 25 years to 31 March 2018, the trust, which was first established in 1909 and has been managed by James Anderson since 2000, has recorded a share price total return of 1,759.56%, according to data from the AIC.
Ms Flood adds: “It is a good example of the returns which are possible from committed long-term holdings in strong, growing businesses with durable competitive advantages, which are run by great management teams whose time horizons are aligned with those of our shareholders.”
In the UK income sector, Nick Train, manager of Finsbury Growth & Income Trust, is equally clear about the benefits of a closed-ended structure for long-term investing.
The trust, which was launched in 1926, has delivered a share price total return of 1,478.43% for the 25 years to 31 March 2018, data from the AIC shows.
He says: “[My company] Lindsell Train was appointed investment adviser to Finsbury Growth & Income Trust in 2001. One of the first investments we made was into AG Barr, the maker of the wondrous Irn-Bru. This was and remains the number one soft drink in Scotland, making Scotland, as a result, one of the very few countries in the world where Coke is available but not the top seller.
“For decades, Warren Buffett had been explaining the merits of investing in leading beverage brands – cost of ingredients very low: consumer loyalty to the brands very high. And we chose to follow his general advice by buying Barr, which is still in the portfolio 17 years later.”
Mr Train notes the value of the shares has increased nearly ninefold since it was first purchased for the portfolio. But he adds: “The statistic I like is this: if you compare Barr’s 2017 dividend payment to our average book cost for the holding, we are now earning a dividend yield of about 19% on the original investment. Only long-term equity investing can do this for you and closed-end investment trusts are some of the best-designed vehicles for long-term equity investing.
“Barr has recently cut the sugar content of Irn-Bru, so you have no excuse not to keep supping the nectar. We’ll see what that does for the shares over the next 17 years.”
Performance of Moneywise’s First 50 investment trusts over 25 years
|Investment trust||AIC sector||Three-year performance||Five-year performance||10-year performance||20-year performance||25-year performance|
|City of London||UK Equity Income||15.84||42.88||132.21||287.13||693.92|
|F&C Commercial Property||Property Direct - UK||18.11||71.81||155.52||N/A||N/A|
|F&C Global Smaller Companies||Global||33.94||75.03||300.69||859.09||1,250.99|
|Finsbury Growth & Income||UK Equity Income||35.15||79.78||304.89||642.64||1,478.43|
|Henderson Smaller Companies||UK Smaller Companies||53.47||115.44||319||398.41||644.22|
|Jupiter European Opportunities||Europe||34.54||84.18||269.25||N/A||N/A|
|Murray International||Global Equity Income||34.14||25.94||158.74||483.42||924.67|
|Picton Property Income||Property Direct - UK||34.15||167.04||148.38||N/A||N/A|
All data to 31 March 2018 using the share price total return (SPTR). N/A applies where funds haven’t existed for this length of time. Source: Morningstar, 11 April 2018.
NYREE STEWART is a freelance personal finance journalist who has written for the Financial Times and Money Observer