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.
10 investment trusts for your ISA
With the new tax year in full swing, now is the perfect time to start using your £20,000 annual ISA allowance. We've got 10 investment trust ideas in this article which should appeal to a wide range of investors.
You can add up to £20,000 in new cash across the range of ISAs each year and avoid paying tax on capital gains and dividend income generated by investments in the ISA.
If you’re raring to go, hopefully you will find some or all of our investment trust ideas useful.
One final point: we’ve pitched all these ideas at long-term investors.
Finsbury Growth & Income (FGT) 739p
This investment trust has been managed by the high-profile fund manager Nick Train since December 2000. He and his team focus
on what they perceive as quality companies which are undervalued and have the capacity to deliver growth in earnings and the dividend over the long-term.
Train runs a concentrated portfolio of around 30 names and there is only modest chopping and changing, with the strategy to remain with most picks for the long haul. Accordingly, the 2017 purchase of shares in football club Manchester United represented the first addition to the portfolio since 2015.
This patient approach makes Finsbury Growth & Income (FGT) a good fit for an investor looking to accumulate funds in an ISA over an extended period. The trust typically trades at a slight premium to net asset value, befitting its strong track record, but also has a policy of buying back shares if they
trade at a discount.
‘The manager believes that good businesses are rare and deserving of higher valuations,’ comment Edison analysts Mel Jenner and
‘Train invests on a bottom-up basis, seeking companies in three broad themes: global consumer brands, owners of media/software intellectual property, and capital market proxies.
‘He selects businesses that are sufficiently durable to growth through different business cycles, with a high return on equity, and relatively low capital intensity/high cash flow generation.’ (TS)
JPMorgan Claverhouse (JCH) 688p
Income is a big reason why people invest in investment trusts and JPMorgan Claverhouse (JCH), focused almost entirely on UK stocks, increased its dividend for a 45th consecutive year in 2018. It currently yields 4%.
Investment trusts can hold back 15% of their income each year to help maintain dividend increases during tougher market conditions.
Claverhouse maintains larger reserves and also greater dividend cover than a lot of the peer group.
We rate this trust as solid holding for investors who want to reinvest a growing stream of income back into the stock market or simply enjoy regular income to help pay the bills.
Claverhouse has a great track record of delivering both income and capital gains. It has achieved 9.2% annualised total return
(share price plus dividend income) over the past decade. It invests in a blend of value and growth stocks in its portfolio with a large cap bias.
Research house QuotedData says the trust aims to maintain a portfolio of between 60 and 80 individual stocks in which the fund manager has high conviction. (TS)
Henderson International Income Trust (HINT) 156.25p
ISA investors seeking a fund with both inflation-beating and Brexit-insulating qualities should consider Henderson International Income Trust (HINT).
It aims to provide a rising level of dividends as well as capital appreciation over the medium to long term. The trust has achieved 10.2% annualised total return over the past five years.
Ben Lofthouse has managed the trust since its 2011 launch. He looks for companies that have strong fundamentals, good balance sheets and attractive cash flow characteristics that can support growing dividends, tending to focus on companies that yield above 2%.
Importantly, the fund manager looks to find these companies from across the globe but not the UK, offering investors the
chance to diversify from any UK-based income generating stocks.
‘HINT has a strong performance record relative to its global equity income peer group and is differentiated by its ex-UK mandate, which we believe makes it a complimentary/complementary vehicle to UK equity income funds,’ says financial services group Winterflood.
‘In addition, while the fund’s yield is one of the lowest in the peer group, its dividend has been fully covered by revenue in each financial year since launch in 2011. In our opinion, this cover, along with the diversification of income sources across geographies and sector, should allow it to continue delivering dividend growth going forward.’ (JC)
Diverse Income Trust (DIVI) 99.9p
This is not your typical income fund. Whereas many of the large dividend-focused investment trusts will be packed full of the same oil, pharma and banking stocks, Diverse Income Trust (DIVI) invests in a much broader range and size of companies, often focusing on niche businesses with limited competition. It says the wider opportunity set offers greater scope to generate returns.
It plays close attention to downside risk and has a put option which could protect some of its portfolio from a significant fall in the FTSE 100 index. Although it costs money to maintain the put option, if the market does fall then the hedging strategy would generate cash to invest in cheap opportunities.
Fund manager Gervais Williams says many investors have become obsessed with growth which has caused them to overlook companies growing at 8% to 10% a year and just focus on 80% to 100% annual growth. He is more willing to consider a broader field of businesses as long as they have sales growth.
Investors have been rewarded with both capital gains and income (it is currently yielding 3.18%). Diverse Income Trust has achieved 12.1% annualised total return over the past five years, nearly twice its benchmark index, the FTSE All-Share total return (6.3% annualised return). (DC)
BlackRock Smaller Companies Trust (BRSC) £13.50
BlackRock Smaller Companies (BRSC) wants to achieve long-term capital growth by investing mainly in smaller UK-listed businesses.
The investment trust believes this mandate enables exposure to some of the fastest growing, innovative and most exciting firms.
Fund manager Mike Prentis seeks cash-generative companies led by a strong management team with a decent market position, as well as a robust balance sheet and track record of growth.
Prentis last year flagged a more cautious stance towards the UK economy and reduced exposure to UK consumer spending. He’s also been taking profit on stocks where valuations have got high.
So why should you own a small cap investment trust? One reason is that small cap firms can benefit from faster growth compared to larger companies. For example, BlackRock portfolio holding Dechra Pharmaceuticals (DPH) has seen its share price surge by 235% over the past five years.
Shareholders in the BlackRock investment trust has been richly rewarded over the years. For example, the trust has achieved 17.5% annualised total return over the past 10 years, according to Morningstar.
‘BlackRock Smaller Companies has an impressive performance record, both in terms of relative performance and consistency, outperforming its benchmark in each of its last 14 financial years,’ comments financial services group Winterflood. (LMJ)
Personal Assets Trust (PNL) £388
Personal Assets Trust (PNL) is aimed at the cautious investor who is more worried about losing money than making outstanding returns. This is reflected in its holdings, with a large allocation to sovereign bonds and gold bullion.
The focus on capital preservation is highlighted by the type of government bonds the trust holds. Two fifths (21%) of its portfolio is invested in US Treasury Inflation-Protected Securities (TIPS), important during times of rising bond yields.
The price of TIPS increases with inflation and decreases with deflation so when it matures, the investor receives the adjusted or original price, whichever is higher.
‘If bond yields continue to rise then the equity market, too, will come under sustained pressure as the cost of capital rises,’ says fund manager Robin Angus.
‘A protracted period of rising yields would make it very difficult to protect capital other than by holding large amounts of liquidity.
‘This is why we have kept duration short on TIPS and UK Index-Linked (our US TIPS have maturity dates ranging from five months to four years and our UK Index-Linked has a maturity of
six years, which reduces their sensitivity to changes in interest rates) in addition to holding high levels of cash and cash equivalents.’
Despite the safety first leanings of this trust, it still has a 42% allocation to equities rather than just relying on the so-called risk free returns of government bonds.
Its equities are high quality names which tend be in sectors such as consumer goods and healthcare, thus avoiding the riskier cyclical stocks and those with high capital intensity.
‘We may not be among the trusts which travel the farthest, but we do (we believe) offer a less bumpy ride,’ says Angus. (DS)
Fidelity Special Values (FSV) 256p
Investors who love to buy quality merchandise when it is on sale should consider all-cap fund Fidelity Special Values (FSV) for their ISA.
Manager Alex Wright follows a value-contrarian philosophy, buying unloved companies in out-of-favour sectors and holding them until their potential value is recognised by the wider market.
Rock-bottom valuations or an asset that should prevent the share price dropping below a certain level, such as inventory or intellectual property, give him a margin of safety.
Research group QuotedData says: ‘The UK market had a strong run of performance during 2017 and Alex Wright is increasingly asked whether he can still find absolute value in the market. His answer is a cautious “yes”.
‘Alex acknowledges that valuations have increased but says this is countered by focusing on recovery stories, so that Fidelity Special Values’ approach does not rely on rising markets to generate returns.’
QuotedData says the portfolio has 14 stocks trading below their book value. ‘Alex sees strong potential from the portfolio and believes that his focus on having a “margin of safety” gives significant protection in the event of a market sell-off.’
Jupiter European Opportunities Trust (JEO) 680p
Jupiter European Opportunities Trust (JEO) fund manager Alexander Darwall believes Europe is brimming with potential.
We also like Europe because it has good economic conditions and decent valuations for companies with encouraging earnings growth.
Jupiter European Opportunities invests in firms with a proven business model and in-demand products. An interesting feature of
the investment trust is that it is expected to benefit from structural drivers, including changes in regulation, consumer habits and tech, rather than being reliant on macroeconomic trends.
Over the last five years, Jupiter European Opportunities has delivered 12.2% annualised total return according to Morningstar.
About one fifth of the portfolio is invested in UK-listed companies. ‘The requirement is that most of the companies held will undertake a substantial proportion of their business activities within Europe,’ says research group Kepler.
‘In the managers’ view, their investee companies are increasingly global, but are unified by their common roots as being driven by European expertise.’
Financial services group Winterflood warns Jupiter European’s performance can diverge at times because it has a high conviction portfolio and isn’t paying close attention to benchmarks like many other trusts. However, it adds: ‘In our view, the fund remains attractive on a long-term view.’ (LMJ)
JPMorgan US Smaller Companies Trust (JUSC) 268p
Although much attention is paid to successful mega-cap tech stocks in the US, there are also plenty of opportunities to be found in the smaller companies’ universe.
JPMorgan US Smaller Companies Trust (JUSC) has a team in New York who focus on companies in the $350m to $10bn market cap range. While that’s deemed small in the US, much of that market cap spectrum is actually bigger than many mid-cap stocks in Europe.
The trust looks at companies which are key beneficiaries of US growth. The team has a preference for quality businesses with durable franchises, strong management and stable earnings that are trading on attractive valuations.
Investment trust experts at stockbroker Numis say JPMorgan US Smaller Companies’ portfolio is well diversified and turnover is low at 20% per year, reflecting the manager’s long term investment horizon. The trust has holdings in a variety of sectors including financial services, health care, leisure and materials.
Past performance has been very good, although there is no guarantee this positive result will be repeated in the future. It has beaten the Russell 2000 NR GBP benchmark in eight out of the last 10 years. The trust has generated 16.4% annualised total return over the past decade. (DS)
PACIFIC ASSETS TRUST (PAC) 240p
Pacific Assets Trust (PAC) is one solution to investors wanting exposure to Asia but who are already well served with Chinese exposure via global investment trusts. Pacific Assets Trust is principally focused elsewhere in Asia; companies listed in India and Taiwan together make up more than half its portfolio by value.
We highly rate the fund manager, Stewart Investors. Its strategy is to invest in good quality companies with strong management teams and sound long-term growth prospects.
Stewart Investors focuses as much on the potential downside of investment decisions as on the anticipated upside.
Pacific Assets Trust has delivered a positive return in eight of the last 10 calendar years. It has achieved 9.7% annualised return over the past decade, up to 23 March 2018.
More than half of the trust’s net asset value (56%) is represented by family-owned companies. ‘We often find the closer owners are to a company’s foundations the stronger the sense of purpose and culture,’ states Pacific Assets Trust in its latest quarterly commentary.
‘Owners with long histories are also more likely to have successfully navigated difficult periods. This is aligned with our focus on not losing our clients’ money.’
Examples of current holdings include Chroma which makes power testing equipment that serves many industries. It spends a greater percentage of sales on money on research and development than its peer group and is aggressively entering the new energy segment including LED, solar and battery. It could benefit in the long-term from electric vehicle and solar testing.
Stewart Investors says Chroma is financially strong and its operating cash flows and profitability remain ‘resilient’ across cycles.
The fund manager is big on engagement in order to help businesses succeed. For example, it is currently engaging with an Indian healthcare company to encourage it to ignore short-term pressures and ‘do what is necessary to strengthen the business for the next few decades and not the next few months’. (DC)