- You can start with one or two of the global one-stop shops
- From UK equity income to infrastructure, we look at what else you can add
The investment trust sector comprises a broad range of options, from the biggest and more established plays to niche trusts that offer exposure to very specific sectors. You can build your portfolio using what is sometimes referred to as a “core and satellite” approach, where you pick a couple of core holdings to cover your basic needs and add some extra, potentially spicier, plays.
You can start with one of the big, one-stop shop global equity trusts, for an active core exposure to global markets. Alliance Trust (ATST), for example, has delivered an impressive performance since moving to a multi-manager strategy in 2017 – it was one of the top performers in the Association of Investment Companies’ global sector in the 10 years to 23 May, right after Scottish Mortgage (SMT) and Manchester & London (MNT), which are much racier plays. The trust tries to combine diversification and concentration by getting 10 stockpickers with different styles to run concentrated strategies of 10 to 20 stocks.
Alternatively, F&C Investment Trust (FCIT) is another well-run, well-diversified global option, although its performance in the past year has been a bit more muted. JPMorgan Global Growth & Income (JGGI) aims to provide investors with a balance between growth and income by looking for the best total return stocks globally, which has also resulted in an impressive long-term track record.
The investment trust sector offers plenty of options to gain exposure to UK markets. Looking at UK equity income, the Merchants Trust’s (MRCH) value bias has worked out well for investors in the medium to long term and could be a good option if you do agree that cheap valuations make the UK market fertile ground for opportunities at the moment. Or, look at City of London (CTY) for a conservative investment style focused on large UK companies that derive large portions of their revenue from overseas. Both trusts feature in the AIC’s “dividend heroes” table; City of London with 57 consecutive years of dividend increases, and Merchants with 42.
You can use investment trusts to dip your toes in markets less suitable for a passive approach or direct stockpicking because they are quite difficult to understand, such as Japan or emerging markets. For Japan, the recent performance of CC Japan Income & Growth (CCJI) really stands out – the trust aims to provide investors with both income and growth by investing in companies with attractive valuations, solid balance sheets and reliable dividends. Meanwhile, Schroder Japan’s (SJG) value tilt has both done well recently and built an excellent long-term track record. Asia-focused Pacific Horizon (PHI), run by Baillie Gifford, makes for a compelling growth-focused recovery play, as the IC argued earlier this year.
Finally, investment trusts are the best way to gain exposure to unlisted markets, because their structure means they do not have to worry about outflows, protecting investors from liquidity concerns, at least to a degree. Not all investors will need these assets in their portfolios, but they can provide useful diversification, income and opportunities for extra growth.
Higher interest rates have made it harder for private equity portfolios to outperform, but many private equity trusts still held up reasonably well in the past two years. Oakley Capital Investments (OCI) has a concentrated portfolio of companies in the technology, education and consumer sectors, all with a focus on digitalisation, decidedly outperformed many peers in 2022 and generally has a solid long-term track record that speaks well of its ‘buy and build’ strategy.
Infrastructure trusts have had a tougher time since interest rates have increased, but Greencoat UK Wind (UKW) remains a solid option to gain exposure to renewable energy thanks to its inflation-linked dividends. Among core infrastructure trusts, which invest in pretty safe assets that are often government-backed, both International Public Partnerships (INPP) and HICL Infrastructure (HICL) look solid. The infrastructure and renewable sectors offer attractive yields and the potential for capital growth if discounts narrow once interest rates start coming down. As of 23 May, Greencoat UK Wind was trading at a discount of 14 per cent, while INPP and HICL were at 16 per cent and 23.2 per cent, respectively.