Last month I visited St Andrews for the first time. Although the British Open was still several weeks away, already a tented village had sprung up in anticipation of all the wining and dining that inevitably accompanies such a premier sporting event. The town was already gearing up to cater for the needs of all those leading golfers who would be present. It was a most impressive sight.As it happens I am not a golfer and the purpose of my visit was to speak at one of the Association of Investment Trust Companies roadshows that travel around the British Isles providing guidance to private investors. It might have been a consequence of the location, but on this occasion the roadshow was a complete sell-out, with a waiting list for those who wished to attend but had failed to register in time. I would like to think that at least part of the reason for the success of this event was down to private investors beginning to appreciate the virtues of investment trusts. I have been attending these roadshows for several years. The aim for me, primarily, is to add my views on what may happen to global markets at the end of a series of presentations designed to give an insight into how the world of investment trusts really works. Because it is a seminar organised by the investment trust trade body I always feel it is incumbent upon me to finish with some ideas on which investment trusts might prove a suitable purchase for private investors. This is not an easy call to make. There are, after all, several hundred available, while everybody’s investment requirements and attitude to risk are different. However, picking the large international trusts has always proved, in my experience, as good a way as any of establishing a first step on the investment trust ladder for those whose experience of them has been limited – or even non-existent. More sophisticated investors might understandably view these trusts as being somewhat too vanilla flavour. They do, though, provide a means of diversifying portfolio risk by both industry and geography that is efficient and cost-effective. Moreover, you do not have to accept mediocre performance when following such a strategy. While the size of some of these trusts inevitably means that significant outperformance of the benchmark is not practical, the tables point to a degree of consistency that is positively encouraging. Looking at the two sectors of Global Growth funds – which admittedly includes those of a specialist nature – a positive picture emerges. Over five years net asset value performance has varied between +85% and -38%, compared with a 19% fall in the FTSE World ex UK index. While the largest rises have been delivered by smaller, specialist trusts, so too have the greatest falls. Overall the positive performance delivered by several large trusts has demonstrated the underlying strength of the manager. The three most consistent performers in the one, three and five-year tables – Law Debenture, Monks and Bankers – are not among the biggest investment trusts, but nor are they minnows. Law Debenture and Bankers come in at over 300m, while Monks’ market capitalisation approaches 640m, despite being on a 15% discount to assets. And this is where these trusts can really come into their own. Not only can you buy assets at a discount, but you can also take advantage of the gearing in portfolios which, properly applied, can help augment performance. Not that purchasing an investment trust rather than an open-ended fund is a guarantee of outperformance. The range of returns demonstrates that. Moreover, net asset value performance is not the most important part of the story from the investor’s point of view, although it is the way in which the true worth of the manager can be best assessed. In the end it is the price performance of the trust that counts. The way in which both the share price and the net asset value per share will behave is not just a consequence of the decisions taken by the manager of the underlying portfolio. Gearing, as previously mentioned, will undoubtedly have an impact in both areas, while the fact that many trusts can and do include unquoted investments will also affect the way performance figures are presented. Indeed, one problem in this area is that putting a true value on investment trust shares – and then calculating meaningful performance – can be tricky and accounts in some measure for the persistence of discounts. But to return to the mainstream international generalist trusts, it is encouraging to see some long-established names at the top end of the tables. Scottish Mortgage, for example, has recorded sterling performance recently, although its five-year record is less impressive. At about 1.1bn market capitalisation, it is one of the largest Global Growth trusts, topped only by Foreign & Colonial, at nearly 2bn, Alliance Trust at 1.5bn and Witan, which has recently restructured the way its portfolio is managed. Global Growth as a sector could be considered a one-stop shop for portfolio management. It particularly suits those seeking to invest a limited sum of money for a long period – on behalf of a child, for example. Perhaps it should come as little surprise, therefore, that both my children had early investments into just such trusts. These trusts may not suit everybody, but for anyone wanting to dip a toe into the investment trust water, they are as good a way as any to start. And all the advantages that investment trusts enjoy are present.
The public is once more becoming comfortable with investment trusts, as witnessed by at least one sell-out AITC roadshow. And where better to start than with the international generalists?