Finding value in investment trusts - John Burke Finding value in investment trusts – John Burke

Veteran What Investment supporter and contributor, John Burke, offers an exclusive and unique overview of the investment trusts' space, in a comprehensive opinion piece.

 investment trusts

Finding value amongst a world of investment trusts

“Generally speaking, the best way to invest – for the medium to long term – is in one of the 92 general investment trusts. That phrasing might seem to be needless repetition, but whilst emphasising the advice, it also covers three qualifications.”:


  • “First of all, there is obviously a wide choice of alternatives for your money, ranging from shares in individual companies to Government stocks or corporate bonds and from building societies to property.
  • Secondly, even the 297 investment trusts that specialise – for example, [in] Japan or healthcare – are also based on spreading risk.
  • Thirdly, a few of these might provide a stellar performance by comparison. Moreover, a general investment trust could be in a cyclical downturn just when personal circumstances require an early sale, so the opening sentence subtly expresses the mandatory warning: “The value of, or income from, the shares can go down as well as up, and you may not get back the original amount you invested.

“That said, there is no better way of hedging your bets than buying into investment trusts whose shareholdings cover the widest range of companies in different sectors – from banking to utilities – either those quoted on the London stock market or on exchanges overseas.

“Apart from that, the specialised alternatives in this field are bewilderingly classified under 15 regional and 28 sectoral headings, with sub-categories as narrow as Property Direct-Asia Pacific: Also included are nine types of venture capital trusts that total 68.

Global or domestic?

“Out of a grand total of 389 investment trusts [as of 31 December 2017], 36 are invested globally, and of these ten go more for income than capital growth, including Henderson Diversified and Investec Perpetual Enhanced that even seek high income. A further two, Marwyn Value and ScotGems, limit their holdings to the world’s smaller companies.

“The other type of general investment trusts picks companies listed on the London Stock Exchange only. This domestic or UK sector can be divided into the 14 that invest for both growth and income, and 26 that concentrate on the latter, while a further 16 specialise in smaller companies. Some trusts include holdings on the Alternative Investment Market (AIM), a riskier sub-market opened in 1995.

“It is significant that many of the general trusts are among the oldest and largest. Their success (unlike American mutual funds that failed to survive the Depression) encouraged several managers half a century ago to launch a plethora of specialised trusts, so that the original has become the flagship at asset management houses.

“The prime example is the group of nine around Foreign & Colonial Investment Trust, launched exactly 150 years ago, and which now has a record 95 per cent of its £3,958 million assets overseas. That is still larger than the £2,977 million of standalone Alliance, established in 1888, but it has been overtaken by the £6,592 million of Scottish Mortgage that dates from 1909. It is one of seven trusts managed at Baillie Gifford.

“All the above-named are invested globally, while the giant of domestic trusts is £2,262 million Mercantile that is among 23 belonging to J.P. Morgan. Established in 1884, it invests across the board, while the largest of those seeking to balance both growth and income are Edinburgh Investment with £1,691 million and City of London (£1,639 million) established in 1891.

“The latter is among 13, which also include the £1,156 million Bankers, at (Janus) Henderson, while BlackRock has ten trusts. Both stables have leaders among the specialists in British smaller companies; their assets exceed £800 million, whereas Atheney is a minnow with only £8 million.

Comparative performance

“Those are among the December 2017 statistics from the Association of Investment Companies that show little difference on average between the ten-year performance of global and domestic sectors when the share-price and dividends are added together. Yet, the average performance of UK Smaller Companies beat all the other 50 AIC sectors apart from Healthcare.

“Individually, there were wide differences. Scottish Mortgage was up 295 per cent, slightly bettered by Independent and F&C Global Smaller, whereas Foreign & Colonial proper managed only 155 per cent. Astoundingly, the top score was 519 per cent from Lindsell Train, whereas investors in Majedie might just as well have left their money in a building society’s bumper account, although someone investing five years ago would now have seen a return of 128 per cent.

“On average over ten years, the Global Equity Income sector showed the same 166 per cent as the overall global one, but the eight trusts also differed widely in performance. Again, adding dividends to the share-price, J.P. Morgan Growth & Income added 202 per cent, but Scottish American and Securities Trust of Scotland achieved only a 110 per cent gain. The two promising high income from global companies fared even worse.

“Trusts categorised as UK Equity Income on average doubled their money in the ten years to December 2017, but, whereas Troy Income & Growth added only 43 per cent to the value, Lowland got a total return of 137 per cent, and Finsbury Growth & Income turned an investment of £1,000 into an astounding £2,407.

“The five, specialising in income from both domestic equities and bonds turned in an average of 129 per cent, with Aberdeen Smaller Companies Income above that and the rest a bit behind.

“It used to be the case that London-oriented trusts were very different from the global ones, because the latter’s income in Dollars, Euros, Yen and other foreign currencies outweighed that in Sterling – which accounted for all the domestic ones’ dividends.

“Today, however, 75 per cent of the earnings of companies in the FTSE 100 index come from overseas anyway, led by such companies as Royal Dutch Shell, which is in many investment trusts’ portfolios (almost 8 per cent at Merchants). Thus, risk and reward can be much the same at home and abroad.

“Almost completely domestic, however, are the smaller companies, including the fledglings on AIM. Even the average performance for this sector was a whopping 270 per cent, and while all of them at least doubled their shareholder’s money, BlackRock Smaller scored 397 per cent and Standard Life’s specialised trust scored 460 per cent. The key factor here is that there is a limit to bigness, whereas firms in new industries still have plenty of room to expand.

Rising income

“Even the overall performance is not the full story.

“There are 20 trusts out of the 389 that have increased their dividends each year for at least two decades. Again, half of them are global, and – with one exception – the rest are not only domestic, but specifically (and logically) those that go for equity income.

“A dozen have been upping payouts for at least 35 years, and all but one of the top six are global. These have been consistent for between 45 and 51 years, as 2018 opened, with the record shared between Bankers and the biggest of domestic income seekers, the aptly named City of London.

“Yet its shares are usually a bit overvalued, whereas, besides normal fluctuations, the prices of most trusts discount the net asset value. This is one of the many factors that make it hard to forecast the winners, so if you have more than £10,000, divide it between a global and a domestic trust. The more you have to invest, the better you can hedge your bets by holding various of these vehicles that themselves make a virtue of diversification.”

*The views expressed in this piece are solely those of John Burke’s and not recommendations by What Investment or Vitesse Media.

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