Ten top Trusts for retail investors

• Investment Trusts were popular with retail investors this ISA season

• Six of the top ten most purchased ISA investments were Investment Trusts

• Ten top Investment Trust suggestions for retail investors

Investment Trusts might get less air time than their Unit Trust or OEIC counterparts, but new data from AJ Bell shows they are very popular with direct retail investors.

Six of the top ten most purchased collective investments via AJ Bell Youinvest this ISA season were Investment Trusts, with the FTSE 100 listed Scottish Mortgage topping the charts.

Most purchased collective investments in ISAs via AJ Bell Youinvest:

January to March 2018

Ryan Hughes, head of active portfolios at AJ Bell, comments:

“Investment Trusts were clearly very popular this ISA season and can be a good option for long term investors considering where to invest their new ISA allowances or pension contributions.  Like Unit Trusts and OEICs, Investment Trusts can offer investors very broad and hence diversified portfolios of investments but there are some differences to be aware of.

“The share price of an Investment Trust can differ from the value of the underlying investments held in the trust, something known as the Net Asset Value (NAV).  Investors should therefore look at whether the trust is trading at a discount to the NAV and is potentially offering good value in that respect or trading at a premium to NAV which may suggest it is expensive.  This information is readily available on the factsheet of the trust.

“Investment Trusts can also borrow money to invest.  Whilst this gives them the opportunity to enhance returns when markets are doing well, it also increases risk if markets take a turn for the worse.  This is therefore another metric investors should check and again the information can be found on the trust’s factsheet.

“Investment Trusts can hold back 15% of their income each year to help maintain dividend increases during tougher market conditions. This smoothing effect means many Investment Trusts have excellent records of dividend increases, some stretching back more than 50 years.

“Like funds, Investment Trusts have specific investment mandates and objectives which can be useful for meeting specific investment preferences or goals.”

Ten Investment Trust ideas to suit different investor preferences

1.     Core holding for long term investors

Finsbury Growth & Income

“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. This patient approach makes Finsbury Growth & Income (FGT) a good fit for an investor looking to accumulate funds 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.”

2.     Core holding for an income investor

JPMorgan Claverhouse

“Income is a big reason why people invest in Investment Trusts and JPMorgan Claverhouse, which is focused almost entirely on UK stocks, increased its dividend for a 45th consecutive year in 2018. It currently yields 4%. Claverhouse maintains larger reserves and also greater dividend cover than a lot of the peer group. This trust can be a 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.”

3.     Good choice for diverse dividend exposure

Henderson International Income Trust

“ISA investors seeking a fund with both inflation beating and Brexit-insulating qualities could consider Henderson International Income Trust. 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.”

4.     An income fund with a difference

Diverse Income Trust

“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 invests in a much broader range and size of companies, often focusing on niche businesses with limited competition. 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. Diverse Income Trust has achieved 12.1% annualised total return over the past five years, nearly twice its benchmark index, the FTSE AllShare total return (6.3% annualised return).”

5.     Great way to play the UK small cap space

Blackrock Smaller Companies Trust

“BlackRock Smaller Companies wants to achieve long-term capital growth by investing mainly in smaller UK-listed businesses. 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. 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.”

6.     One for a cautious investor

Personal Assets Trust

“Personal Assets Trust 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. 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.”

7.     One for a contrarian investor

Fidelity Special Values

“Investors who love to buy quality merchandise when it is on sale should consider all-cap fund Fidelity Special Values. 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. Portfolio positions range from financial services provider Citigroup to construction firm CRH and pharma group Shire.”

8.     Good for exposure to Europe

Jupiter European Opportunities Trust

“Jupiter European Opportunities Trust 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.“

9.     A different way to play the US market

JPMorgan US Smaller Companies Trust

“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 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. 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.”

10.  Good for exposure to Asia

Pacific Assets Trust

“Pacific Assets Trust 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. The 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.”