Understanding why certain investment trusts are so popular
A desire to generate returns through income and/or growth is a long-standing goal for investors but do you know the most popular investment products to achieve this goal?
We’ve looked at the 30 most widely-held investment trusts among AJ Bell Youinvest customers to see which products resonate with UK investors and why they might be attracted to them.
THE SEARCH FOR RISING INCOME
Delivering a high and rising income is where investment trusts come into their own, helped by their ability to squirrel away income in the good times to boost payouts in the bad times.
Unsurprisingly, with interest rates still at historically low levels and cash on deposit earning next to nothing, investors are hunting for a real and rising income through diversified global funds such as F&C Investment Trust (FCIT) and Witan Investment Trust (WTAN), thereby reducing exposure to Brexit-induced uncertainties on home turf.
Despite concerns over the potential for a radical, Jeremy Corbyn-led policy programme, investors continue to warm to HICL infrastructure (HICL), offering diversified exposure to international infrastructure assets and delivering a growing dividend backed by predictable cash flows and strong inflation correlation.
Performance over the long haul is another reason why certain investment trusts are popular with a large number of people.
And the returns generated by Scottish Mortgage (SMT) are certain to be a key reason why the investment trust remains a real favourite with retail investors, trading on a 3.5% premium to net asset value (NAV) at the time of writing.
Scottish Mortgage invests in a high conviction, global portfolio of companies which the managers believe are strong, well-run businesses offering the best potential durable growth opportunities for the future. Top holdings include retailer Amazon, genetic analysis specialist Illumina and electric car maker Tesla.
Owning a portfolio primarily of high growth names, many highly rated on conventional valuation measures, has served Scottish Mortgage well. One risk factor to weigh is that during periods when valuations are questioned or investors rotate away from growth and tech companies, parts of the portfolio could come under selling pressure.
While investors should never assume that a strong run for the share price will continue indefinitely, one can look at past performance to see if funds have a track record of consistently doing well. Investors should look for fund managers with skill and not simply ones that have got lucky for a short period.
Long-term superior performance certainly isn’t restricted to Scottish Mortgage. Two technology trusts also stand out for their large returns over the years, being Polar Capital Technology Trust (PCT) and Allianz Technology Trust (ATT).
Collectives exposed to the fast-moving world of technology might sound high risk to some, yet between them, the portfolios of these two trusts have benefited from exposure to world changing tech giants such as Amazon, Microsoft, Alphabet, Apple and Facebook that have made investors an absolute mint.
The fund managers at Polar Capital and Allianz would argue that technology is well-positioned to remain a major driver of market returns.
And despite high valuations for some high growth companies, the tech sector is the domain of some massive addressable markets and provides fertile ground for some of the best absolute and relative return opportunities in equity markets.
As such, a bigger risk for growth investors would be ignoring the space when technology is disrupting existing business models and carving out entirely new industries.
A key theme among some investors is to buy shares in investment trusts that aim to deliver growth but without taking too much risk. Here investors are seeking to put money into products that could protect their capital in hard times, essentially giving up some of the potential rewards in exchange for more security.
Nonetheless you could still lose money with these products. Personal Assets (PNL) aims to avoid permanent capital loss while growing income over time; and RIT Capital Partners (RCP) is focused on long-term capital growth twinned with capital protection.
Interestingly RIT Capital has managed to deliver very decent gains over the years, perhaps even better than many trusts which are happy to take large risks. It says anyone who invested in RIT Capital when it launched in 1988 and still holding today would have enjoyed 12.1% annual share price total return.
We aren’t surprised to see the list of the most widely-held investment trusts include products linked to three of the most famous fund managers in the UK. After all, these managers have earned their reputation through delivering good returns over the years. Whether they can all sustain this trend over the very long term is open to debate.
Terry Smith isn’t the fund manager on Smithson (SSON) but investors still want a piece of his proven investment strategy which is being deployed by the named manager, Simon Barnard. This investment trust is less than a year old and so investors are putting a lot of faith in Barnard to repeat Smith’s success.
Nick Train’s Finsbury Growth & Income (FGT) remains popular with UK investors, offering a concentrated portfolio of companies which either generate lots of cash and/or are embracing technology to improve how they do business and deliver goods and services.
And despite the fact that his reputation has recently taken
a battering, Britain’s most famous fund manager Neil Woodford still retains a semi-loyal following with Woodford Patient Capital (WPCT).