Investment Trust Insider - Opening the door to investment trusts

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Ian Cowie: global trusts make a great legacy for the grandkids

Ian Cowie: global trusts make a great legacy for the grandkids

Without wishing to sound morbid as I skid sideways into my seventh decade, it’s all very well talking about the medium to long term but there are some times these days when I hesitate to buy green bananas.

So a recent email from a reader touched a nerve. He said he had always invested in shares in the past but no longer did so because he couldn’t be sure of surviving to see the rewards!

On a brighter note, he still wanted to know what asset to buy to build a fund for a seven year-old grand-daughter. My initial thought was that with at least a decade of uncertainty ahead of her, the more diversification to diminish risk the better.

More positively, a global investment trust should also gain exposure to wealth creation wherever it occurs.

So I reminded the reader that I am not authorised to provide investment advice but promised to write this article. The first thing I discovered on researching it is that none of the stock exchange-listed global funds I have held in the past, or bought for our son, has done particularly well.

The top-performing global investment trusts over the last decade are, in descending order: Lindsell Train (LTI) with a share price total return of 1,314% or more than treble the sector average of 426%; Scottish Mortgage (SMT) with 685%; Edinburgh Worldwide (EWI) with 496%; Independent (IIT) with 450% and BMO - formerly F&C - Global Smaller Companies (BGSC) with 408%.

Unfortunately, LTI trades on a stonking 83% premium to net asset value (NAV), so it is priced for perfection and buyers today are taking a big bet on its outperformance continuing. Worse still, nearly half the fund - or 47% of NAV - is invested in Lindsell Train Limited (unlisted), so LTI is somewhat opaque.

Silver and bronze medalists, SMT and EWI, are both managed by Baillie Gifford, which speaks well of the Edinburgh-based fund manager’s high conviction approach to newish technology disrupters.

Unfortunately, it also raises questions about whether its current success can be sustained over the next decade.

Everyone knows about SMT’s top holdings in Amazon (AMZN.O), Illumina (ILMN.O) and Alibaba (BABA.N) with cash-guzzling, loss-maker Tesla (TSLA.O) chugging along in fifth place. However, I was surprised to see EWI’s three biggest holdings are Ocado (OCDO), the UK’s leading online grocer, Lending Tree (TREE.O), a US lending exchange, and MarketAxess (MKTX.O), an electronic bond trading platform. Both trusts also trade at small premia to NAV of 3% and 1%.

Fortunately, the fourth and fifth best global investment trusts over the last decade offer bargain-hunters something to get their teeth into. IIT and BGSC both trade at modest discounts to NAV of 5% and 4% respectively.

IIT is self-managed by veteran stock picker Max Ward at the eponymous Independent Investment Trust and its top three holdings are Fevertree Drinks (FEVR), Redrow (RDW) and Blue Prism (PRSMB). The leader there is a tonic-maker close to my heart - and wallet - but even I never had the nerve to let this AIM share run up to 10% of my portfolio.

Looking under the bonnet at BGSC is also an eye-opener because, despite the global name and sector, all three of its top holdings are Japanese funds run by Eastspring, Aberdeen and Pinebridge respectively, while another investment trust, Scottish Oriental Smaller Companies (SST), holds fourth place.

So BGSC is effectively a closed-end fund of funds, albeit a highly successful and sustained one, having increased its dividends for 48 years on the trot. It is the only member of the Association of Investment Companies’ (AIC) prestigious ‘dividend heroes’ club among these top five global performers over the last decade.

Against all that, buyers today receive a meagre yield of 1.1% albeit one that has risen by an average of more than 13% per annum over the last five years. If that rate of growth in payouts is sustained in future, the yield would double in less than five-and-a-half years.

But I suspect it will be much, much longer than that before our reader’s granddaughter is bothered about dividend income. More immediately, the AIC data suggests it is well worth looking beyond the obvious global giants such as Alliance Trust (ATST), F&C (FCIT) and Witan (WTAN) which I have held and bought for our son in the past. Their 10-year returns are 260%, 278% and 291% respectively.

Better do it sooner than later, too. Because, as the economist John Maynard Keynes pointed out: ‘In the long run, we are all dead.’

Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.



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