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Valentine’s Day: investment trusts to fall in love with

Investment trusts make ideal long-term financial partners. We sift through the listed stock market funds hitting the highs - and lows - in the investor popularity stakes.

Investments for a long-term commitment

Let’s start by back tracking on our main headline. You see, falling in love with your investments is never a good idea. Emotional detachment is needed if you are to successfully back your winners but drop your losers when necessary.

Making a long-term commitment to your investments, however, is totally proper, particularly if you are saving for your retirement. It is no accident that our columnist Ian Cowie refers to his ‘forever’ fund of shares and investment trusts.

That’s because investment trusts with their stable pools of capital - that mean their fund managers will rarely be forced to sell stocks they don’t want to - making these ‘closed-end’ funds perfect for long-term investors.

But which of the 400 or so listed on the London Stock Exchange should you choose? On this day of love and romance we highlight a series of investment trusts you might want to get to know a little better.

For beginners, we start with the popular trusts, that it seems virtually everybody loves to date, before moving on to the less well-known but equally attractive ‘wallflowers’ and ending with a bunch of unloved trusts that – because far fewer people want them – offer some of the best bargains around.

For more information on the investment trusts mentioned in this article, please follow the links to their fact sheets.

Next: the trusts everybody loves

If you want to see all the slides on one page click here.

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Investments for a long-term commitment

Let’s start by back tracking on our main headline. You see, falling in love with your investments is never a good idea. Emotional detachment is needed if you are to successfully back your winners but drop your losers when necessary.

Making a long-term commitment to your investments, however, is totally proper, particularly if you are saving for your retirement. It is no accident that our columnist Ian Cowie refers to his ‘forever’ fund of shares and investment trusts.

That’s because investment trusts with their stable pools of capital - that mean their fund managers will rarely be forced to sell stocks they don’t want to - making these ‘closed-end’ funds perfect for long-term investors.

But which of the 400 or so listed on the London Stock Exchange should you choose? On this day of love and romance we highlight a series of investment trusts you might want to get to know a little better.

For beginners, we start with the popular trusts, that it seems virtually everybody loves to date, before moving on to the less well-known but equally attractive ‘wallflowers’ and ending with a bunch of unloved trusts that – because far fewer people want them – offer some of the best bargains around.

For more information on the investment trusts mentioned in this article, please follow the links to their fact sheets.

Next: the trusts everybody loves

If you want to see all the slides on one page click here.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

The trusts everybody loves

If you are a regular reader of this website it is likely that you own at least one of the investment trusts in the table below. They are regularly cited by journalists, analysts and wealth managers as ideal, core, long-term holdings for private investors.

Trust Manager Sector Approach
Scottish Mortgage Trust (SMT) James Anderson, Tom Slater Global Growth High conviction, high growth 
F&C Investment Trust (FCIT) Paul Niven Global Growth Growth & income from highly diversified portfolio
Smithson (SSON) Simon Barnard, Will Morgan Global Small & ‘Mid-Cap’ High quality growth
Fidelity Special Values (FSV) Alex Wright UK Growth Contrarian, seeks undervalued companies
Finsbury Growth & Income (FGT) Nick Train UK Growth & Income High quality growth consumer brand companies
City of London (CTY) Job Curtis UK Growth & Income Income & growth from mostly FTSE 100 stocks

That’s because their long-term performance is good if not excellent; their investment proposition is clearly expressed, often by a trusted, ’star’ fund manager; their charges are reasonable if not low compared to other actively managed funds; they are large and easy to trade; and are managed so as to avoid their shares either falling to large discounts below - or rising to high premiums above - their underlying net asset value (NAV). 

As a result, they’re popular and among the biggest issuers of new shares. For example, Scottish Mortgage (SMT), the £7.3 billion global investment trust listed in the FTSE 100 index of top UK companies, issued £323 million of shares to meet investor demand last year, while Smithson (SSON) raised a record £882.5 million at its launch in September (despite its short history it is included here because of the stunningly successful record of founder Terry Smith on his Fundsmith Equity fund.)

Having celebrated its 150th birthday last year, F&C (FCIT), formerly Foreign & Colonial, is also on a roll. For the first time in living memory, the £3.7 billion global trust recently started re-issuing shares it bought back from investors around a decade ago when it was less popular.

Next: meet the ‘wallflowers’

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Meet the ‘wallflowers’

The following investment trusts may not be as good at promoting themselves as those on the previous page and their charges are generally not as keen, but they are large funds run by experienced fund managers offering reasonable if not good liquidity for buyers and sellers. 

Although last year was difficult for these trusts, it means some of their shares are trading at discounts or below their normal valuations. Check the fact sheets for yesterday’s closing share price and any discount (or premium) to net asset value.

Despite the end-of-year sell-off, their long-term performance remains strong and, importantly, they provide special expertise to interest the discerning investor. For example, if you think environmental sustainability, technology, healthcare and emerging markets remain important drivers of future growth, the first five trusts are worth getting to know.

Trust Manager Sector Approach
Impax Environmental Markets (IEM) Bruce Jenkyn-Jones, Jon Forster Specialist: Environmental Capital growth from sustainable technology 
Allianz Technology Trust (ATT)  Team led by Walter Price Tech, Media & Telecom Capital growth from listed tech companies
Polar Capital Technology (PCT) Team led by Ben Rogoff Tech, Media & Telecom Capital growth from listed tech companies
Worldwide Healthcare (WWH) Sven Borho, Trevor M Polischuk Biotechnology/Life Sciences Capital growth from pharma & biotech companies
Templeton Emerging Markets (TEM) Chetan Sehgal, Andrew Ness Global Emerging Markets Capital growth from emerging markets
British Empire (BTEM) Joe Bauernfreund Global Growth Capital growth from undervalued investment companies
Law Debenture (LWDB) James Henderson Global Growth Growth and income from UK equities and financial services 
Witan (WTAN) Andrew Bell, James Hart Global Growth Growth and income from multi-manager portfolio

The last three offer different types of expertise as well as demonstrating the investment trust sector’s penchant for strange or downright irrelevant names! The 129-year-old British Empire (BTEM) may sound like an imperial throwback but is in fact an increasingly canny and determined investor in investment companies and holding companies trading at big discounts to their underlying value. On a 9% discount to NAV its own shares offer value and a distinct investment approach.

Similarly, Law Debenture (LWDB) also dates back to 1889 and stands on a 9% discount. It offers unique access to a company combining a UK share portfolio managed by James Henderson at Janus Henderson, and a financial services division under new management seeking to boost shareholder returns and dividends.

Witan (WTAN) - derived from Witenagemot, an assembly of advisers to Anglo-Saxon kings - is a ‘multi-manager’ fund, appointing six external fund managers to look after portions of its assets, an approach that has proved successful in the past 10 years.

Next: unloved trusts in need of attention

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Unloved trusts in need of attention

Moving further out along the popularity spectrum, we end with a look at some good trusts that have either fallen out of favour or are just misunderstood. While their undervalued shares are not as eye-catching as the trusts on our first two slides, there’s every chance some will mount a ‘surprise’ recovery that early birds can benefit from.

Brexit is the key factor with our first two choices. Edinburgh (EDIN) is down in the dumps after a three-year spell of underperformance under Invesco’s Mark Barnett, who took over the £1.2 billion UK equity income trust after his former boss Neil Woodford quit to set up his own firm. Returns to shareholders (who I should disclose include me via my pension) have been hit by some poor stock picking and a heavy weighting to tobacco stocks which have fallen heavily in the past year. However, the main factor has been the third of the portfolio in cheap UK domestic stocks which Barnett believes have been unduly punished over fears of the impact of Brexit on the UK economy.

Should the economy not be wrecked by whatever happens on or after 29 March, it is possible the trust could rebound and deliver ‘significant outperformance’ said analysts at Numis Securities as they retained Edinburgh as a ‘core’ recommendation last month. Its shares stand 8% below their net asset value and yield 4.3%.

The Brexit cloud also hangs over the shares of Mercantile (MRC), a £1.5 billion trust with a good record of investing in ‘mid-cap’ stocks outside the FTSE 100. Its shares trade at a 9% discount to NAV and could look cheap when sentiment towards the UK stock market improves.

Trust Manager Sector Approach
Edinburgh (EDIN) Mark Barnett UK Growth & Income Growth and income from UK equities
Mercantile (MRC) Guy Anderson and team UK Growth Growth from UK smaller and medium-sized companies
Brunner (BUT) Lucy MacDonald Global Growth Growth and income
Caledonia Investments (CLDN) William Wyatt Flexible Investment Growth and income with low volatility
Invesco Asia (IAT) Ian Hargreaves Asia Pacific ex-Japan Capital growth
Harbourvest Global Private Equity (HVPE) Team Private Equity Invests in Harbourvest funds

The £317 million Brunner (BUTdoes not stand out in the competitive Global sector in terms of size or performance – shareholder returns are well below the sector average over all time periods. Liquidity in the shares isn’t great either due to the big stakes held by Aviva, the insurance giant, and the wealthy Brunner family. However, fund manager Lucy MacDonald has sharpened the global portfolio of late and reduced its exposure to the UK. While recent returns have continued to look lacklustre with just 1.6% growth in the portfolio over the past year, that’s probably due to a decision last year to repay some of its expensive debt early, a move that frees up cash that should pass through in higher returns and dividends in future. On a lowly 11% discount, the shares are worth looking out for.

Another overlooked global trust is Caledonia (CLDN). Backed by the Cayzer shipping dynasty, it sits in the Flexible Investments sector due to its £1.9 billion ‘multi-asset’ portfolio combining shares, funds and private equity investments in companies that are not on the stock market. This eclectic mix has never caught the imagination in a way that the similar Rothschild family backed RIT Capital Partners (RCP) has. That said, recently the shares’ wide discount to net asset value has narrowed from 18% to 14% as some investors have warmed to its steady, long-term approach while stock markets are uncertain.

It’s often said that the private equity component of Caledonia is what puts off investors. There could be some truth in that given that pure private equity trusts trade on extremely wide discounts (with the notable exception of 3i (III) which normally stands on a hefty premium). One such is Harbourvest Global Private Equity (HVPE), a £1.1 billion ‘fund of funds’ investing in the funds of US private equity manager Harbourvest.

Suspicion about the true level of charges paid by investors has probably deterred investors and the shares trade 18% below net asset value. Given that the portfolio has doubled investors’ money in the past five years though, and provided a global recession doesn’t occur, that looks cheap.

Concerns about China’s trade war with the US and its impact on the world economy have overshadowed Asia Pacific trusts. One such is Invesco Asia (IAT), which until recently traded on a 12% discount despite the good long-term returns under fund manager Ian Hargreaves. A decision by the board to hike the dividend policy prompted analysts at JP Morgan Cazenove to add the trust to their model portfolio. The discount has since narrowed to 10% but still looks good value for a long-term investment.  

 

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