Investors are increasingly opting for geographic diversification
Thursday 03 Oct 2019 Author: Steven Frazer

Political and economic turmoil continues to grip the UK. Many investors have been sent running for safer places to stash their cash. Bond markets have soared, gold is close to record highs and money continues to flood out of UK equity funds.

UK investors have been struggling to get much bang for their buck ever since the FTSE 100 first cracked the 7,000 ceiling in December 2016. In the near three years since, investors have earned just 17.5%, including dividends. The Thomson Reuters Global Total Return index has rallied 29.5% over the same spell.

The FTSE 100 is no higher now that it was in early 2017. Even the September rally is said to be no more than bargain hunting rather than any real change in the market mood.

It is therefore time to consider going global as a way to build diversification and spread risk, and investment trusts offer plenty of useful opportunities.

EIGHTEEN OPTIONS

There are 18 trusts in the global sector of the Association of Investment Companies (AIC) including Lindsell Train (LTI), Manchester & London (MNL), Mid Wynd International (MWY) and Scottish Mortgage Investment Trust (SMT), all of which have put up triple-digit share price returns over the past five years, far outstripping the investment trust global sector average of 95.3%.

The beauty of a global investment mandate is that the trust can invest in world class companies wherever they are, rather than being hamstrung by what is available on the London Stock Exchange.

Technology giant Microsoft is one of the most popular stocks to appear in portfolios of the global investment trust universe, offering a combination of growth and income. Amazon is also in many portfolios, as are payments firms like Visa and PayPal. Investors can also gain access to companies such as Swiss pharma group Roche, Estee Lauder of France and Japanese games maker Nintendo via global investment trusts.

WHERE MANAGERS SEE OPPORTUNITY

The US is the most popular place to invest among global trusts. The S&P 500 has rallied nearly 52% over five years.

Europe is still popular but Japan, China and the Far East in general remain niche markets for most trusts.

Loyalty to the UK companies remains strong despite the lacklustre performance from the London market as a whole. Another important factor is that share prices of some very good UK businesses are artificially depressed because of the political and economic worries, and that means bargains can be had.

Brunner has nearly a quarter of its portfolio invested in the UK, with similar conviction shown by Bankers (BNKR) and and Witan (WTAN).

THE UNDERPERFORMERS

So what about the laggards as surely being in the global sector doesn’t automatically equate to superior returns? AVI Global (AGT), for example, has a five year total return of 60.1%, putting it among the bottom performers in the global category. Its focus on value stocks, which tend to trade at discounts to underlying net assets, has clearly been a tough space during the market’s fixation with go-go growth stocks.

JPMorgan Elect (JPE) has also disappointed. It invests in a range of other investment trusts, tapping into a greater pool of manager’s stock-picking expertise. Yet this strategy can expose the trust to widening discounts to net asset value as well as falling underlying stock prices, a twin-pronged threat that seems to have dragged on its own five year total return of 64.8%. That’s a decent enough return, just not as good as many of its peer group.

More encouraging is the performance from F&C Investment Trust (FCIT) which started life more than 150 years ago. The fund initially invested in emerging market government bonds but today puts shareholder money to work in businesses listed all over the world, in privately owned companies and in private equity.

Over five years F&C has delivered a 95.6% total return. Amazon, Microsoft, Facebook and Alphabet are among its biggest stakes.

Just remember an investment that has done well in the past isn’t guaranteed to do the same in the future, so don’t pick investment trusts purely on past performance.

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