Generalist investment trusts have had plenty of critics over the years. More than once these trusts, which are often very large and invest globally in the shares of many different types of companies, have been condemned as unwieldy dinosaurs. Yet while they may not offer the excitement of specialist trusts, which concentrate on one sector or geographic region, they do not have their disadvantages either. Indeed, for many investors they are an ideal choice.

Compared to specialist trusts, the performance of generalist trusts can appear unexciting. However, choosing a trust that focuses on one sector and is currently riding high in the performance tables can be risky. Investors considering a highly specialist trust should always remind themselves of what happened during the technology bubble. In the late 1990s, technology funds were producing very tempting returns and many investors were drawn into them. But then in 2000 the bubble burst, prices went into a tail-spin and those investors lost money.

Resisting the fashion
Yet it is difficult not to be tempted by the latest investment fashion. Recent examples include property trusts, which looked like long-term winners a couple of years ago but are now standing at a loss and on large discounts to their net asset value. More recently, commodity funds have taken centre-stage. There is no doubt that money can be made from these sectors, but if you buy into a specialist fund there is no escape for the investment managers once the shares become overheated. It means a downturn in performance is inevitable, which can lead to losses and in some cases the winding up of the trust.

Certain overseas markets can also move in and out of fashion. During the 1990s, for example, emerging markets and Far Eastern funds were very popular until the Asian currency and banking crisis occurred at the end of the decade, when they fell out of favour and some investment funds were closed down. In recent years, emerging markets are back in style again.

The advantage of investing in generalist trusts is that managers have the flexibility to move money into whichever sector or region offers the most potential, but they can also move out again when they believe that sector or country has reached its full value and switch their investments elsewhere. They are not restricted to investing in one place or type of stock.

So they have been able to move into mining stock and have an exposure to China in recent years but can also invest in utility companies and mainstream markets. Having the freedom to invest in any type of stock or market means the trusts can ride out difficult economic conditions, moving into more defensive sectors when the need arises – an attribute that could prove particularly useful if the global economy goes into a recessionary phase.

Lessons of longevity
The proof of the pudding is the longevity of several of the global generalists. Some have been around for over 100 years, including trusts such as Foreign & Colonial, Scottish Investment Trust, Alliance Trust and Bankers. Though several of these specialised when initially set up in the late 1800s in such investments as steamships or helping to finance the railways in North and South America, they later adapted and became more broadly based. Since then, they have weathered world wars, recessions, periods of high inflation and stock market booms and busts. However, there have been periods when their days looked numbered.

In the 1980s and 1990s, the performance of many international generalist trusts was flagging. Institutional investors were selling their holdings in the trusts and their share prices fell so they were trading at large discounts to asset value. At that time several large trusts were taken over by pension funds, which saw them as an easy way of expanding their share portfolios on the cheap. Some commentators started predicting the demise of the generalists.

However, since then the boards of these trusts have become more proactive. They have changed their investment policies. Some, such as Scottish Investment Trust, have adopted a more focused investment approach, reducing the number of holdings in their portfolios. Others have decided to outsource all or part of their management to other investment specialists, such as Witan, which has adopted a multi-manager strategy.

Alternatively, like Edinburgh Investment Trust and Scottish American Investment Trust, they have moved the responsibility for their portfolios to completely new managers. All trusts have now implemented discount control mechanisms, buying back their own shares in an effort to prevent them trading at large discounts.

Standing out from the crowd
Trusts are also trying to differentiate themselves from each other, says John Newlands, head of investment company research at stockbrokers Bell Lawrie.

He explains, ‘Nowadays all the large generalists are trying to do something different. They are no longer just quasi-trackers.

‘Many older trusts have pulled their socks up in recent years, such as Scottish Mortgage, managed by James Anderson, which has become more focused and is now doing well, while Scottish Investment Trust under the stewardship of John Kennedy does not have the staid portfolio it did a few years ago, it is now more of a global best ideas trust and its performance has improved accordingly.’

Tim Cockerill, head of research at independent financial advisory company Rowan Plc, agrees: ‘Trusts have had to evolve, otherwise they will become extinct. Foreign & Colonial is a good example. Its performance had suffered and action was taken, including outsourcing the US and Japanese portions of its portfolios. As a result its performance has improved over the past five years and it has outperformed the FTSE 100.’

Now Cockerill would happily recommend Foreign & Colonial to a cautious investor seeking a reliable investment. He says, ‘It is hugely diversified with over 600 holdings and is £2 billion in size. Contracting out some of the overseas management has given the whole trust a new lease of life. It is never going to set the world alight, but if you want “steady” then this should be a reasonable choice.’

Global coverage
Generalist investment trusts are nowadays found in the ‘global growth’ category
of trusts. Some of these are relative newcomers, such as RIT Capital Partners and SVM Global. As well as investing in international equities, these trusts also invest in a variety of asset types. In recent years, these have included ‘alternative’ assets such as private equity and hedge funds, as well as property and gilts. Some have been particularly active in their asset allocation, which is often viewed as a more important source of investment return than stock selection.

Over the past year, as stock markets became more volatile as a result of the credit crunch, RIT Capital Partners, for example, cut its exposure to listed equities from nearly 60 per cent to around 35 per cent, increasing its exposure to gilts to over 20 per cent
of its portfolio. Hedge funds, private equity partnerships and property also form part of the portfolio.

So who should invest in generalist investment trusts today? Annabel Brodie-Smith, communications director at the Association of Investment Companies, says ‘The advantage of these trusts is that they are a one-stop shop. You get a global portfolio, so you have exposure to the UK and to all the other major stock markets around the world. You get a professional investment manager to take care of your portfolio and they are very good value for money. They are long-term investments that can be used for everything from saving for children to investing for retirement.’

Savings options
Generalist trusts are attractive for small and large investors. Investors can put in lump sums from as little as £250 and regular savings of £25 a month. There are no other investments that would give small investors as much geographical diversity or exposure to as many asset classes. For larger investors they provide excellent ‘core’ holdings in large portfolios, so they are often used as a foundation investment in self-invested personal pensions (SIPPs) as they ensure that a wide range of sectors and geographical areas are covered, thereby providing a wide spread of risk.

Having a professional manager to decide your investment allocation
is becoming increasingly valuable. With returns likely to be coming down after several years of rising markets, the low annual management charges on generalists will also help to maximise returns.