Introducing the investment trusts on the FTSE 350
Investors who prefer to entrust capital allocation decisions to a professional money manager as opposed to buying individual stocks are exceptionally well served by the FTSE 350. Within its ranks, you’ll find a highly-diverse batch of investment trusts spanning all the key asset classes.
Shares’ number-crunching reveals a grand total of 57 investment trusts within the FTSE 350 – that is with some very sizeable real estate investment trusts stripped out - with a total market cap of £81.1bn as at 8 August 2019.
Through these collectives, investors can access a variety of strategies spanning equity income, growth and value funds to portfolios specialising in everything from infrastructure to property, private equity and healthcare as well as global equities and emerging markets.
FTSE 350 BIG BEASTS
Among the London market’s largest 350 companies are some of the big beasts of the fund management industry, whose market valuations have often soared on account of superb performances and voracious appetites for their particular strategies, often satisfied by new share issuance to manage outsized premiums to net asset value (NAV).
The standout name in market cap terms is Scottish Mortgage (SMT), the Baillie Gifford-managed trust whose £7.8bn tag places it within the elevated ranks of the FTSE 100.
One of Shares’ running Great Ideas, Scottish Mortgage is a technology-focused investment trust with an excellent long-run value creation track record, its success built on buying some of the global market’s winning, albeit highly rated, tech growth stocks.
Investors remain keen to access the stock picking acumen of managers James Anderson and Tom Slater, although the trust now trades on an unusual 0.8% discount following the recent equities rout.
Shares admires the trust’s long-term approach, with money put patiently to work with disruptive firms with durable competitive advantages run by excellent management teams.
However, it should be noted this a highly concentrated portfolio with the largest 30 of 84 holdings, among them Amazon, Tencent and Tesla, accounting for 76.4% of total assets as at 30 June.
Owning a portfolio primarily of go-go-growth names, many highly rated on conventional valuation measures, has served Scottish Mortgage well, although during periods when investors rotate away from growth and tech companies towards value, parts of the portfolio could come under selling pressure.
With a market cap approaching £3.8bn is F&C Investment Trust (FCIT), formerly Foreign & Colonial and famous for being the world’s first ever investment trust launched way back in 1868.
2018 marked the 150-year anniversary of a trust with demonstrable durability, having flourished in the face of two world wars, the great depression and the 2008 global financial crisis.
Unsurprisingly with interest rates mired at historically low levels and cash on deposit earning next to nothing, investors have bid up shares in diversified global funds such as the Paul Niven-managed F&C.
The trust a ‘big daddy’ in terms of diversification as it is invested in over 500 companies in 35 countries. Also proving popular of late is multi-manager global equity fund Alliance Trust (ATST). Alliance Trust is into its third year under a new strategy born out of pressure from activist investors.
Also popular are fellow long-run progressive dividend payers such as the Andrew Bell-guided Witan Investment Trust (WTAN) and Bankers (BNKR), the Janus Henderson Investors-steered trust with a bumper 186 holdings at last count.
The quest for income also explains the popularity of the Job Curtis-managed City of London (CTY), as well as the specialist infrastructure portfolios HICL Infrastructure (HICL) and International Public Partnership (INPP), a pair offering diversified exposure to international infrastructure assets and delivering growing shareholder rewards backed by predictable cash flows with strong inflation correlation.
Also meriting mention given its chunky £3.2bn valuation is RIT Capital Partners (RCP), prized by investors for its prowess in preserving investors’ capital.
RIT Capital Partners has long been synonymous with its founder, Lord Rothschild, who steps down as chairman on 30 September to take up the role of president of RIT, but this hasn’t rattled investors as the trust continues to trade at a premium to net asset value (NAV).
One of Shares’ current Great Ideas, this unique vehicle is invested in a widely diversified and international portfolio across a range of asset classes, both quoted and unquoted. Net assets topped £3bn for the first time as of 30 June 2019 and £10,000 invested in RIT at inception back in 1988 would be worth around £360,000 today with dividends reinvested. The same amount put to work in the MSCI All Country World Index would have grown to circa £85,000.
Another popular trust is AIC UK Equity Income favourite Finsbury Growth & Income Trust (FGT), whose star manager Nick Train is sometimes known as the king of buy-and-hold investing. Train’s approach involves building a concentrated portfolio of quality companies with strong brands and/or powerful market franchises.
Finsbury Growth & Income is invested in high-quality businesses with strong cash generation to underpin growing dividends and with the ability to adjust and thrive in different market and economic conditions, among them FTSE 100 publishing powerhouse RELX (REL), consumer goods colossus Unilever (ULVR), alcoholic drinks giant Diageo (DGE) and beverages-to-biscuits maker Mondelez International.
With technology continuing to rapidly expand its addressable market, portfolios offering exposure to its secular growth themes remain popular and inhabit the ranks of the FTSE 350. Run by Ben Rogoff is another running Great Idea, namely Polar Capital Technology Trust (PCT), a benchmark-beating fund flush with most of the world’s best-known companies, among them Google parent Alphabet, Microsoft and Apple.
Currently trading at a 6.9% discount, the trust also offers exposure to big Chinese technology growth names Tencent and Alibaba, as well as less widely known software stocks including Twilio, New Relic and Alteryx.
Sitting on an even wider 17.2% discount is Herald Investment Trust (HRI), a backer of smaller quoted companies in the areas of communications, multi-media and technology that has dramatically outperformed the Numis Smaller Companies plus AIM ex. Investment trusts and Russell 2000 Tech Index since inception.
Other denizens of the FTSE 350 include Law Debenture (LWDB), yet another of our Great Ideas selections. Half year results (24 Jul) revealed a good start to 2019 for the investment trust which looks for quality companies with the potential for long-term growth and which have been mispriced by the market.
FIVE TRUSTS TO BUY
Fidelity Special Values (FSV) 244p
Discount – 3.1%
AIC Sector – UK All Companies
Fidelity Special Values (FSV) is an all-cap fund with a value-contrarian philosophy managed by well-followed Alex Wright, who remains very positive on the opportunities available to contrarian investors in a deeply unloved UK market. The £676.9m cap trust buys beaten up companies in out-of-favour sectors and holds them until their potential value is recognised by the wider market. Wright’s day job entails researching and meeting the management teams of companies, looking for those that offer some degree of downside protection but also ‘potential for a positive change to show them in a new light’. Increased clarity on the UK’s exit from the EU could trigger a material re-rating of UK-listed companies and a boost for the portfolio, which is invested in the likes of Royal Dutch Shell (RDSA) and Royal Bank of Scotland (RBS) as well as tobacco stock Imperial Brands (IMB) and the educational publisher Pearson (PSON).
BlackRock Smaller Companies (BRSC) £13.08
Discount – 10.5%
AIC Sector – UK Smaller Companies
Popular with investors for its stellar long-run track record yet trading on a 10.5% discount nonetheless, BlackRock Smaller Companies (BRSC) is now managed by Roland Arnold, who became lead manager on the retirement of Mike Prentis this summer. The transition should prove seamless as Arnold had worked with Prentis since 2004 and will stick with Prentis’ tried-and-tested quality growth bias approach. BlackRock Smaller Companies is a diversified portfolio of high-quality companies that have the potential to become much bigger. The focus is on companies with proven, trustworthy management, strong market positions, a clear record of earnings growth, good conversion of earnings into cash and a sound balance sheet. Currently passing muster with Arnold are the likes of polling outfit YouGov (YOU:AIM), high-flying media group Future (FUTR), 4imprint (FOUR) and patent translation expert RWS Holdings (RWS:AIM).
Witan Investment Trust (WTAN) 215.5p
Discount – 3.5%
AIC Sector – Global
A 3.5% discount to NAV presents a good opportunity to secure access to Witan Investment Trust (WTAN), a reassuringly diversified closed-ended fund with 44 years of consecutive dividend growth under its belt. The dividend for 2018 was increased 11.9% to 23.5p, well ahead of the rate of UK inflation and more than double that paid in 2008. A long-established multi-manager fund with a strong track record, this AIC Dividend Hero uses 10 different third party fund managers who are experts in different fields and together they invest in global equities and speak for the bulk of the portfolio; the aim is to also generate less volatile returns than a portfolio managed by a single manager by tapping into the expertise of Lansdowne Partners, Veritas, Lindsell Train, Artemis, Crux and others. Roughly 10% of the portfolio is managed in-house by Witan’s executive team including CEO Andrew Bell, who has been responsible for the overall running of the fund since 2010.
JPMorgan Emerging Markets (JMG) £10.18
Discount – 7.4%
AIC Sector – Global Emerging Markets
Risk-tolerant growth investors seeking to put money to work in developing economies might look to JPMorgan Emerging Markets (JMG), where the discount has started to narrow in yet remains fairly attractive at 7.4%. Austin Forey has managed the trust since its 1994 inception with a bottom up, long term philosophy which seems the right approach for generating good returns from far-flung economies over time. Stifel recently noted that trust has been ‘by some margin, the best performing generalist emerging markets trust over the last one, three and five years and is the only trust which has not experienced a change in its management team over the last few years’. Forey is blessed with the ability to forage for opportunities in all emerging markets – as at 30 June, the fund was 29.3% invested in China with allocations to India (21.3%), South Africa (9.8%), Taiwan (8.3%), Brazil (7.6%) and Indonesia (4.6%) - and currently has positions in the likes of Tencent, Taiwan Semiconductor Manufacturing and Tata Consultancy Services as well as financials including AIA, Housing Development Finance and Ping An Insurance.
HICL Infrastructure (HICL) 163.4p
Premium – 5.1%
AIC Sector – Infrastructure
Shares believes it is worth paying up for FTSE 250 constituent HICL Infrastructure (HICL), currently trading on a 5.1% premium to NAV. The fund provides enviable diversification by asset risk and a growing dividend backed by predictable cash flows and strong inflation correlation. A long term equity investor in infrastructure, HICL has defensive attributes, since the projects and assets it backs support communities and facilitate the delivery of essential public services. Managed by infrastructure specialist InfraRed Capital Partners, the fund’s portfolio of 118 investments located in the UK, France, Ireland, the Netherlands, Canada and the USA are positioned at the lower end of the risk spectrum, spanning PPP, regulated assets and also demand-based assets such as student accommodation for example. Based on HICL’s year to March 2020 target dividend guidance of 8.25p, there’s a tasty 5% yield on the table for investors at the current share price.