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.
Flexible investment trusts can protect you against inflation
Moving up and down is hard-wired into the stock market but 2021 has, so far, been particularly volatile. Year-to-date the UK’s benchmark FTSE 100 index has on four occasions slumped around 2.5% in a single day, while twice ripping higher by similar-sized advances. Moves of more than 1% in either direction have become almost routine.
Most readers will know that the threat of surging inflation has held the key to these sudden jolts in stock markets, we have covered the topic multiple times in Shares.
Day traders may chase these short, sharp spikes up and down but most investors sensibly avoid trying to second guess the market’s mood. However it doesn’t hurt to equip your portfolio with the right tools to protect against volatility. This is where flexible investment trusts can really add value, typically putting your money to work across many different asset classes – bonds, gold, property say, in markets all over the world in one simple package.
In much the same way that open-ended multi-asset funds work, the idea of a flexible investment trust is to give you instant diversification by blending together different asset classes with a view to improving performance and managing risk.
Whereas most investment trusts are largely focused on equities, a flexible investment trust can hold substantial investments in things like corporate and government bonds, index-linked cash vehicles, illiquid income assets and even other funds, providing significant shelter for your money during periods of extreme unpredictability and protection for any income you may rely on.
‘Assets like commercial property, infrastructure and renewable energy can all offer a higher level of income,’ says the AIC (Association of Investment), the investment trusts industry body.
Take the flexible Capital Gearing Trust (CGT). It has the twin objective of preserving shareholders’ real wealth and achieving absolute total returns over the medium to longer term so its portfolio net is cast far and wide to provide returns and protection for shareholders.
The trust has less than 50% of its portfolio in funds and individual equities. About a quarter of assets are UK based and around 5% is in cash.
Compare that with, say, Lindsell Train Investment Trust (LTI), a popular choice with retail investors that mainly buys shares – 93.1% of assets are currently in stocks, based on AIC data.
This is spread over companies large and small and from all over the world, including many well-known names, like London Stock Exchange (LSE), consumer products groups Diageo (DGE) and Unilever (ULVR), plus Japanese computer games designer Nintendo and PayPal, the digital payments firm.
From a performance perspective, Lindsell Train wins hands down when markets have been relatively stable. However, in the year between May 2019 and 2020 it would have lost an investor a third of their money, mainly because of the huge uncertainty created by the Covid-19 outbreak. By contrast, over that same year period, Capital Gearing would not only have avoided losing you money, it would have made 3% for investors, continuing to outstrip the commensurate level of inflation.
That said, Capital Gearing’s annual average total return of 7.85% over the past five years falls far short of Lindsell Train’s 21.1%.
Craig Richardson, who is involved in running a small private fund, starting properly looking at investment trusts in 2018 when he decided to consolidate a company pension scheme into a SIPP that he could self-manage. Since then he has become a big fan of closed-end funds, and particularly of flexible investment trusts for both his SIPP and ISA.
Other examples of flexible trusts beyond Capital Gearing include RIT Capital Partners (RCP) and Caledonia Investments (CLDN), both originating from private family wealth fund, Personal Assets Trust (PAT) and BMO Managed Portfolio Growth Trust (BMPG), ‘an investment trust that invests largely in other investment trusts,’ Richardson points out.
For illustration, these five flexible trusts (if we include Capital Gearing) have combined for an average annual total return of 24.8% over the past three years, according to Winterflood data, smashing the dismal 0.68% equivalent performance of the FTSE 100 over the same time frame.
Thanks to their structure flexible trusts (and the wider investment trust universe) were useful for income seekers in 2020 when many corporate dividends were axed or postponed. Companies battening down their balance sheet hatches as the pandemic broke and they went into capital preservation overdrive.
During such times of stress, trusts are able to call on their reserves to protect investors from the worst effects of those dividend cuts.
‘Investment companies can hold back some income in good times to pay it out in leaner ones,’ says the AIC. ‘This means that investment companies can maintain or increase their dividends even at times when the companies they invest in are reducing theirs.’
For all the reasons discussed above flexible investment trusts could have a place as part of a retail investor’s overall portfolio, providing capital and income protection during a period when inflation risks and the continuing course of the Covid-19 pandemic are creating considerable uncertainty.