Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Top-quality investment trusts for your ISA or SIPP
Thursday 06 Oct 2016 Author: Daniel Coatsworth

Wouldn’t it be nice if you could buy an investment trust or fund and see it deliver a consistent performance year in, year out?

We’ve found a group of products that arguably have the hallmarks of being reliable or fairly consistent performers. There is no guarantee they will always deliver positive results in the future, but their track record is so good that you should sit up and take notice.

We look at some of the top ranking investment trusts in this article and cast the spotlight on high quality unit trusts/open ended investment companies (Oeics) – being two core types of funds – in next week’s issue of Shares. Many of these products could, in our opinion, be considered as great building blocks for your ISA or self-invested personal pension (SIPP).

cover story1

Judge of quality

A lot of factsheets contain one, three and five year performance data. That isn’t enough information if you want a good representation of how a product performs over the longer term.

The stock market might have been in a rising trend for that entire period, so it would be easy for an investment collective to also turn in a good performance

A better way of judging quality is to look at the 10 year track record. That should include both good and bad times on the market. Essentially you want to see how a product performs through the course of a full economic cycle.

We have sought investment trusts and funds that delivered a minimum 7% total return each year. Total return is the increase or decrease in the value of the shares or fund units plus any dividends.

Not a single investment trust from the search results managed to produce 7% or more every single year between the start of 2006 and the end of 2015. We aren’t surprised given the period included one of the worst global financial crises in history.

However, several investment trusts did meet the criteria for nine of the 10 years. In total, 34 investment trusts produced 7% or more gains for at least seven of the past 10 years. Read on to learn about some of the winners.

cover story2

The standout performer over the past decade has been Lindsell Train Investment Trust (LTI) which has delivered a total return in excess of 7% each year for nine of the past 10 years – six of those years it exceeded 20%. Even 2016’s year to date performance is fantastic, up 41%.

It has a broad remit where it can invest in any sector or market. Top holdings include gaming giant Nintendo (7974:TYO), London Stock Exchange (LSE) and beer seller Heineken (HEIA:AMS).

At present you pay a low annual fee of 0.65% and get exposure to a variety of big names around the world. What makes this product so interesting is its 24.5% stake in Lindsell Train Limited, the management company that runs five funds including the investment trust in question.

At face value the Lindsell Train Investment Trust looks extremely expensive, trading on a 65% premium to net asset value (NAV).

Some investors argue the premium is justified in the belief that the management business is undervalued, saying it should be valued on a multiple of earnings and not net asset value.

You could argue that its very good performance over the past decade warrants a premium rating as well. Fund manager Nick Train is highly respected in the market as being a good stock picker.

Anyone put off by Lindsell’s valuation may wish to look at one of Train’s other trusts – Finsbury Growth & Income Trust (FGT) which has beaten the 7% minimum total return per year hurdle in six of the past 10 years and trades in line with NAV. Three of those years saw total returns of 25% or more.

Martin Currie Global Portfolio Trust (MNP) has achieved more than 10% annual total return in seven of the past 10 years, with credit going to fund manager Tom Walker who has run the investment trust for 16 years.

He believes the product is an ‘ideal’ core equity holding for a long term investor. ‘Shareholders have benefited from strong long-term performance, inflation-beating income growth and many shareholder-friendly policies,’ he says.

The investment trust consists of 50 to 60 international stocks, spreading risk and providing access to potential gains from stock markets worldwide.

The portfolio currently has positions in such companies as tech giant Apple (AAPL:NDQ), car maker Toyota (7203:TYO), aerospace group Lockheed Martin (LMT:NYSE) and the owners of clothing/fashion brands like TK Maxx and Victoria’s Secret.

Brussels, Belgium - Januari 12, 2016: White Toyota Land RAV4 Hybrid crossover SUV front view. The Recreational Active Vehicle with 4-wheel drive hybrid version combines a 2.5-liter Atkinson cycle petrol engine with a powerful electric motor. The car is on display during the 2016 Brussels Motor Show. The car is displayed on a motor show stand, with lights reflecting off of the body. There are people looking around and other cars on display in the background.

‘We focus on finding higher-quality businesses with favourable prospects, sound financials and the ability to generate healthy cash flow,’ says the fund manager. ‘If you had invested the current ISA allowance in the trust 16 years ago – at the trust’s inception – you would have received more than £8,000 in dividend payments alone. And even though taking dividends reduces your total return, the original investment would have more than doubled.’

Edinburgh Investment Trust (EDIN) is an interesting inclusion on the list as it suffered a traumatic period in late 2013/early 2014 when its fund manager Neil Woodford quit and set up shop on his own. His replacement, Mark Barnett, had to quickly regain investors’ confidence in the UK equity-focused investment trust.

The performance statistics prove he was successful – it generated 11% total return in 2014 and 15% gains in 2015. ‘A good chunk of the 10-year performance is attributable to Woodford,’ says analyst Matthew Read at QuotedData. ‘There were a lot of outflows when he took over, but he’s a very credible fund manager.’

Edinburgh belongs in Invesco Perpetual’s stable of funds. The asset manager says the product’s resilient performance since it took over the fund’s management in 2008 has been driven in principle by holdings in the tobacco and pharmaceutical sectors.

‘Despite headwinds from declining volumes, increased regulation and, most recently, the introduction of plain packaging, the share prices of tobacco companies have delivered impressive returns as the market has recognised the sector’s resilient business models and prodigious cash flows,’ says Invesco.

It adds that Barnett sold down some of the portfolio’s ‘super-concentrated’ individual holdings when he took over from Woodford, particularly in the pharmaceutical sector. ‘This freed up resources to invest across a broader range of favoured stocks, notably in financial services where new holdings were established in Legal & General (LGEN) and London Stock Exchange.’

Scottish Mortgage (SMT) is one of the most popular investment trusts on the market, according to the number of ‘buy’ orders on AJ Bell Youinvest’s platform.

The Baillie Gifford-managed product scores very highly in our research exercise, delivering 25% or more annual total return in five of the past 10 years. It beats 7% total return in eight of these 10 years.

‘The investment trust’s basic investment philosophy is very simple,’ says Catharine Flood, client service director at Baillie Gifford. ‘We look to create a relatively concentrated portfolio of the best growth opportunities available around the globe, regardless of geography or industry, and then hold those investments for the long term, by which we mean at least the next five years and beyond.’

Scottish Mortgage isn’t afraid to allocate large amounts of the fund to companies in which it has strong conviction. For example, Amazon (AMZN:NDQ) accounts for 10.3% of the investment trust. The top 10 holdings represent more than half (55.5%) the entire fund, as of 31 August 2016.

Paris, France - January 28, 2016: Amazon logotype printed on cardboard box side seen from above on a wooden parwuet floor. Amazon is an American electronic e-commerce company distribution worlwide e-commerce goods

‘Over the past 10 years for which we have held Amazon’s shares in the portfolio, the shares have risen more than 1,500%. It is the largest single contributor to returns over the period,’ says Flood. ‘Broadly speaking, this is due to Amazon’s clear focus and corporate ambition, combined with constant reinvestment in its own future growth.’

The second biggest holding is genomic testing group Illumina (ILMN:NDQ). An estimated 90% of all genomic sequencing has been done on Illumina’s machines, according to Flood.

The investment trust can also invest up to 25% in unquoted firms and has stakes in companies that have chosen not to list on a public market despite being of a decent size. Holdings include two businesses that have truly disrupted their respective industries: accommodation company Airbnb and music streaming group Spotify.

Independent Investment Trust (IIT) should interest fans of Scottish Mortgage as there is a link between the two products. Independent’s managing director and fund manager Max Ward used to be the manager of Scottish Mortgage between 1989 and 2000. He is also a director at Edinburgh Investment Trust.

Independent has delivered some very strong returns over the past decade, although the down years also tend to be particularly bad. For example, while in 2006 it generated a 46.2% total return. Yet in 2008 it posted a 47.2% negative return, according to QuotedData.

Ward is paid a flat fee of £200,000 a year to run Independent which is considerably less than many fund managers are paid. That helps to keep the ongoing charges for shareholders low at 0.32%, according to Morningstar data.

Independent invests in UK and overseas stocks and, if appropriate, index futures. It has proclaimed a liking to take part in IPOs (initial public offerings) which is the opposite of many other fund managers who like to see a company prove its worth as a listed company before making an investment. Eleven out of its 28 holdings, as of 30 June 2016, have joined the stock market in the past two years.

It has a big exposure to housebuilders with six holdings in this sector accounting for 21.8% of total assets, according to mid-year data. You’d need to have a strong stomach to hold this investment trust at present, in our opinion, as newly-floated companies can be unpredictable investments and housebuilders could be volatile performers if the UK economy goes into decline as a result of Brexit preparations.


Four private equity-focused funds appear on our list of star performing investment trusts over the past decade, which may come as a surprise. Private equity returns tend to be lumpy and unpredictable, as they are generally dependent on businesses in the portfolio being sold to a trade buyer or floated on the stock market.

To see private equity funds deliver strong performance on a near-consistent basis would imply they have a solid portfolio of investments at different stages of their business life. That could result in a steady flow of exits each year, thereby crystallising value for shareholders.

From our list, Foreign & Colonial Investment Trust (FRCL) invests in both quoted and unquoted companies. Electra Private Equity (ELTA) achieved greater than a 7% annual total return in eight out of 10 years to the end of 2015, although it suffered the most of the three products in the down years including a 63.3% loss in 2008.

Northern Investors (NRI) passed our criteria test on seven out of the past 10 years. It is being wound up, having decided in 2011 to start selling its holdings and return money to shareholders.

F&C Private Equity Trust (FPEO) invests in a range of private equity funds, so you benefit from broad diversity of underlying holdings. It has beaten 7% annual total return in nine out of the past 10 years. Seven of those years saw annual returns in excess of 15%.

‘Private equity as a mode of investment, benefits from, but does not require, a strong economic background for success,’ insists F&C fund manager Hamish Mair, who has managed the trust for more than 16 years.

‘F&C Private Equity Trust has maintained a steady rate of investment through the cycle, continually rejuvenating the broadly spread portfolio through backing high quality investment partners,’ he explains.

‘The key differentiating features for this fund over others in its sector is its focus on mid and lower mid-market European buy-outs, which comprise the bulk of the portfolio. This is a broad and inefficient market populated by a number of lesser known private equity investors.’

Biotech Growth Trust (BIOG) had a slow start on our 10 year analysis period but raced ahead from 2008 onwards. It is managed by US healthcare investor OrbiMed and takes stakes in biotechnology companies.

‘It has clearly been in the right space,’ says Read at QuotedData. ‘One benefit has been big pharmaceutical companies restocking their pipeline (via acquisitions) as patents expire and demand increases from an ageing population. Bring these together and you get super returns.’

Winterflood analyst Kieran Drake notes the view of OrbiMed founding partner Sven Borho who believes major biotech stocks are more defensive than other sectors as drug sales are less sensitive to the macro economy. However, it is hard to ignore that market concerns about a potential cap on drug pricing in the US weighing on the sector at present.

Drake said in July 2016 that he preferred another OrbiMed-run trust, being the more diversified Worldwide Healthcare Trust (WWH). That has beaten our 7% minimum annual total return hurdle for seven out of the past 10 years, although its 286% cumulative return is nearly half that achieved by Biotech Growth at 525.3%, according to QuotedData.
DISCLOSURE: The author holds shares in Scottish Mortgage

‹ Previous2016-10-06Next ›