Investment Trusts can have some important advantages over unit trust or OEIC funds. Being ‘closed ended’ and having a fixed number of shares means there is no need to buy or sell assets to keep up with the changing demand of investors. This can allow a fund manager to be more fully invested as there is no need to keep some cash in reserve to meet redemptions.
It also means that investment trusts can be more appropriate vehicles to access more esoteric, ‘illiquid’ assets that cannot be traded easily, such as commercial property, infrastructure projects, frontier markets or private companies. Having a fixed pool of assets means that there is no need to engage in lengthy or expensive buying and selling to meet investor demand.
Another important feature of investment trusts is the option to borrow to invest, also known as ‘gearing’. This generally increases the volatility of a trust’s asset value – and share price – which can mean a boost to returns in a rising market. However, the opposite is generally the case in a falling market and, if not carefully managed, a Trust can become burdened with expensive borrowing arrangements.
For income seekers, a further defining characteristic of investment trusts is the ability to retain income generated by its underlying assets. This can help smooth dividend payments to investors. For instance, in a recession when lots of dividend cuts take place a Trust can use reserves to maintain or even grow its payments.
A wide range of investment trusts are available through Direct Investment Service – there are nearly 500 to choose from covering virtually any imaginable geographical area and asset class – but there are some perennial favourites among investors. The list below represents the top five (by number of client holdings) on the Direct Investment Service platform.
Scottish Mortgage is an adventurous investment trust targeting companies that harness technological change to create new markets or uproot existing ones, and thereby provide investors with substantial growth opportunities.
There is particular focus on innovation among US companies, notably within Silicon Valley, and on China where the managers James Anderson and Tom Slater of Baillie Gifford have established a presence a network of contacts. Traditionally, the portfolio has been invested in internet companies with Amazon, Google (now Alphabet) and Facebook all backed from an early stage, but now areas as diverse as finance, energy, healthcare and transport are all important. Current top holdings include Tesla, Delivery Hero and biotech firms Illumina and Moderna.
Private investments have contributed significantly to the Trust’s returns and represent, perhaps, the biggest ‘edge’ the managers possess. Just over a third of the current portfolio started off in the unquoted arena and increasingly the managers see non-listed investments – ones to which regular investors cannot gain access – as offering the best potential in the future. That’s because some of the most innovative companies in the world today are private businesses, often because they are technology-based and have lower costs meaning there is little need to raise capital via the stock market to grow.
A favourite among income seekers, City of London’s objective is to provide a reliable and rising income, alongside capital growth, from a broad portfolio of UK companies, mainly large ‘blue chip’ businesses. The trust has the longest track record of providing annual dividend increases in its investment trust sector, presently standing at 54 years and soon to become 55.
The Trust is managed by Job Curtis of Janus Henderson who has been at the helm for 30 years. He takes a long-term view and favours conservatively run and well-financed businesses companies that can deliver sustainable cash flow to support both dividends and capital expenditure to fund growth. This approach has delivered small but steady outperformance over the years, and an enviable dividend track record, although past performance is not a guide to the future.
The high yield of 4.8% currently, variable not guaranteed, remains an attraction. However, it should be noted the Trust has been calling upon its reserves built up over the years in order to maintain dividend increases amid the decline in pay-outs from many UK companies resulting from the effects of the Covid pandemic and the uncertainty created.
Growth in patient numbers, spending and drug approvals are the structural drivers behind the healthcare sector. The pace of innovation is also increasing. The industry is producing cures, treatments and technologies at a faster pace than ever before – so it is well placed to meet the growing demand.
These ingredients make the sector popular with investors looking for growth, and in our view the complexities mean there is scope for specialist active managers to add significant value. Worldwide Healthcare Trust has been managed by New York-based OrbiMed Capital for nearly 25 years. They are the largest dedicated healthcare investment firm in the world with around 80 investment professionals. The depth of resource upon which they can draw in terms of medical and investment expertise, longevity in the sector and network of industry contacts is impressive.
The portfolio comprises a combination of pharmaceutical majors such as Bristol-Myers Squibb, Merck and AstraZeneca, broad healthcare companies such as United Health, device manufacturers and smaller, innovative firms. At present, three key themes are oncology, liquid biopsy and emerging market exposure, notably in the fast-growing Chinese market.
RIT offers a portfolio featuring a broad range of assets and takes a flexible, differentiated and unconstrained approach. The overall aim of the Trust is to beat inflation while limiting the ups and downs usually associated with investing in the stock market – a goal that resonates with many investors.
Shares make up the core of the Trust, represented by managed funds and some individual stocks, and this is supplemented by bonds, absolute return funds, investments in private companies and the ability to add downside ‘protection’ through derivatives.
One of the main differentiating factors is the exposure to private equity investments, which are made directly, alongside established partners or through specialist third-party funds. RIT has access to a broad range of private equity investments through a well-established network. These sorts of investments (currently representing around a quarter of the portfolio, with two-thirds in funds and one third in direct holdings) are ordinarily out of reach for private investors but can provide a rich source of returns as well as important diversification.
Like Scottish Mortgage, Monks is managed by Baillie Gifford with the objective of harnessing the long-term growth of global companies. However, it is focused more on listed companies and it has a broader spread of different types of businesses and industries. It includes many more established businesses alongside the more disruptive, technology-led businesses backed by Scottish Mortgage.
The result is a more diverse and well-rounded portfolio than the higher-octane Scottish Mortgage, which means the Trust could be worth considering as a ‘core’ holding for global equities that is still aligned with exciting themes linked to secular changes in the global economy and society.
The managers spread the portfolio across companies that fall into one of four broad growth categories: ‘growth stalwarts’ that can deliver robust returns and profitability regardless of the economic conditions; ‘rapid growth’ companies in the earlier stages of their development; ‘cyclical growth’ businesses that rely to some extent on economic cycles but can ultimately grow through them; and ‘latent growth’, which comprises out-of-favour businesses that are experiencing a catalyst that could rapidly accelerate earnings from an unspectacular level.
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