Unit trusts and open-ended investment companies (OEICs) significantly outnumber the number of investment trusts, but we still have more than 200 trusts investing in equities, and a further 130 non-equity ‘alternative income’ trusts to choose from.

The size of these investment trusts (in terms of assets under management) vary from a few million pounds to about £8.5bn, and their ages from freshly launched to over 150 years.

So if I want to build a diversified portfolio of investment trusts, where do I start? But first things first…

What is an Investment Trust?

 In short, Investment Trusts are companies that invest in other companies or assets.

Why Invest in Investment Trusts?

• Investment trusts take a long-term view which means you can ‘set and forget’ your money to be invested without tinkering around too much and just let the Trust managers do their job for you. On that note…

• Trusts have boards of directors charged with looking out for the interests of shareholders.

• Compared to other investment vehicles, trusts keep costs down. Which is partly why…

• Investment trusts have a long-term record of outperforming other types of investment funds. Investment trusts consistently outperform Unit trusts/Oeics. what’s more, this advantage is greatest in illiquid asset classes (hard to buy/sell or value reliably). In particular, smaller companies, property, private equity and infrastructure projects.  IT’s have a reputation for impressive long term performance. The average investment trust has outperformed the average open-ended fund (OEIC) in almost every sector and almost any time-frame

• Most income trusts have accumulated close to or more than one year’s dividend worth of reserves and those funds with bigger revenue reserves dividend coverage are best positioned to weather the Coronavurus storm. Despite pandemic-induced uncertainty, the majority of investment trusts are rich in reserves and positioned well to weather the storm. Analysts also expect boards to pay dividends out of capital if they run out of revenue reserves.

• Boom Bust Invest Check:- Although the model portfolio below is not necessarily aimed at income, investment trusts offer a huge advantage over individual FTSE 100 companies as they can hold on to income during decent years, and then pay it out when times are bad. They have a significant capacity to ‘smooth out’ their dividend payouts.

• Boom Bust Invest Check:- Other Investment structures can increase the risk of losses if there is a crash or sell-off in the markets.
  With Unit trusts (OEIC’s), investors can panic sell at the bottom of the market (as happened in 2008 at low prices), which dilutes the shareholders who didn’t sell. A well documented recent example of this was the ‘Woodford’ fund. He had to sell the good stuff in order to meet fund redemptions.

A conventional portfolio with mixed bonds and equities is designed to lower risk, but yields on government and corporate bonds are now low currently offering an unimpressive return. As an alternative, professional investors have been using income investment trusts as ‘bond-like’ investment alternatives. However, results have been mixed!

Many investors confuse risk with volatility (the number and size of ups and downs a given asset class tend to experience over time). But risk is best defined as the possibility of a permanent loss of capital, not gyrations in the market.

Most investors will seek a diversified portfolio to mitigate returns in volatile markets, well spread across asset classes, geographies, sectors and size segments (large, medium and small-cap stocks). A simple strategy that is extremely easy to implement and is very low maintenance is to invest in one ‘established’ medium-risk international investment trust such as Monks, Alliance or F&C. ‘Set and Forget’.

Diversification ‘mistakes’ investors commonly make

1. Overweight the FTSE and UK in general. The UK accounts for well under 10% of global equity markets and can be seens as dominated by average performing mega-caps. Yes, FTSE 100 earnings may be international (70% of revenue is from outside the UK) but this is no substitute for a truly international spread.

2. Underweight the US. The US accounts for over half of total global equity market valuation. There is more exposure to healthcare and technology sectors. Many of these companies are relatively new but are already global household names. The US market is indeed relatively expensive in price/earnings terms, but this has been the case for a generation. High growth has consistently made fools of the bears.

3. Overweight eclectic holdings. It’s easy to get enticed into a regional fund based on the latest buzz region in the financial press, or into exotic funds investing in mining or timber. One or two of these investments may be fine, but best to stick to the mainstream for at least 90% of a portfolio.

A good portfolio will have a sizeable core of global trusts whose managers can focus on the best opportunities, regardless of geography or sector.

Specialist trusts, such as private equity, technology and healthcare, give exposure to expertise in areas beyond that of the global investors. Alternative income trusts provide income and, if well chosen, reduce risk and volatility.

If your Investment Trust portfolio ends up with more than ten well-picked holdings, You will have a well-diversified, low-cost, low-maintenance portfolio.

The FREE MoneyWeek Investment Trust Portfolio!

Since 2012, Moneyweek has been compiling a small portfolio of investment trusts for retail investors who want to hold actively managed funds, but don’t know where to start. Moneyweek continuously evaluates the portfolio constituents changing only when necessary.

What is in the Portfolio?

Personal Assets is a highly defensive trust aimed, for the most part, at capital protection. This balances out the growth focus of Scottish Mortgage. The Law Debenture trust provides exposure to value-orientated stock-picking strategies, while both RIT and Caledonia give us exposure to both listed and interesting unlisted companies.

Personal Assets Trust managed by Sebastian Lyon of Troy Asset Management has a primary goal of avoiding the loss of capital (hence gold, cash, short-dated government bonds, high-quality equities). AJ Bell has judged this trust to provide an “instantly diversified portfolio in just one holding”.

Temple Bar takes a contrarian approach focusing on UK companies that have fallen out of favour. That hasn’t actually been particularly successful over the last few years (think Brexit uncertainty), but a solid yield of more than 4%, plus holdings in some cheap companies are maintaining the yield. Top holdings include BP and Shell. The energy sector has been one of the worst performers of 2019 so value investors take note!

Caledonia, like Scottish Mortgage, provides exposure to unquoted assets (37% of the portfolio) and on its current discount to net asset value (NAV), offers significant value for long-term investors. 

The model portfolio can be found in the ‘Investment Trusts’ section of the Money Week website:- CLICK HERE

How much in each Portfolio Holding? Rebalancing

RIT may currently hold undervalued investments (hence its lowly stated NAV) and has significantly outperformed Law Debenture (current discount of 8.6%). To ‘rebalance’ then sell some RIT and buy some  Law Debenture so that you end up with an equal amount of each in your portfolio. The idea is to hold an equal amount in each investment trust.

Moneyweek recommends rebalancing the portfolio occasionally (once a year is fine) to ensure you sell shares in trusts that have outpaced the others in the portfolio and buy up those that are then ‘underweight’. For example, if you have held the portfolio since the beginning and not rebalanced, you would be very ‘overweight’ Scottish Mortgage, a great trust in the portfolio since the beginning. If it continues to perform then great, but if the pendulum swings and super-growth tech stocks (that Scottish Mortgage holds) take a tumble (likely at some stage), the overweight tech focus could easily hurt long term returns.

So how do I know the investment trust portfolio will continue to beat the market in the way that it has since its inception? I don’t! But what I do know is that it includes trusts that Moneyweek consider to be well run and they have a great deal of experience. I do know that it will be well-diversified and reasonably low cost. These factors are prerequisites of good long-term performance.

The model portfolio can be found in the ‘Investment Trusts’ section of the Money Week website:- CLICK HERE

Portfolio Performance

The Money Week Investment Trust portfolio has significantly outperformed the FTSE All-Share and the MSCI World index. By the end of last year, the portfolio had returned 116%, compared with a 64.5% return from the FTSE All-Share and 91% from the MSCI World index since launch in the middle of 2012

Moneyweek 2019

Investment Trusts Outperform

In the ten years to 2009, and in the decade to 1967 the average trust made 175% as global markets returned only 75%. In 1966 when markets fell 8% trusts lost only 4%. And this year: from the beginning of 2020 to 8 April, the wider UK market fell 24.5%, the investment trust sector fell only 15.2%. (This is, of course, the effect of the Great 2020 Coronacrash.)

Boom Bust Invest Check: We can see then that an investment trust portfolio offers greater protection than standard trackers or ETF’s in say the FTSE 100/250/All Share. This we like… a LOT!

Index/Portfolio / YoY (Mar 2020) / Last 3 month (Mar 2020)

FTSE 100 / -21% / -23%

FTSE All-Share / -20% / -23%

FTSE World / -9.55% / -17.75%

Money Week Investment / Trust portfolio / -7.85 % / -13.36%

Most investment companies have fallen along with the wider market (bar a few such as BH Macro which aim to benefit from rises in volatility). The big defensive trusts – which aim to protect your capital – have held up pretty well too.

Discount to  ‘net asset value’

When the share price of the average investment trust falls to a large discount to its net asset value (in other words, the share price of the trust fell below the value per share of the underlying portfolio owned by the trust 

Any Cons?

Maybe the only potential negative for trusts is that as noted earlier, their share prices, driven by investor demand and supply, diverge from underlying asset value. This results in the shares trading at a premium or discount to net asset value (NAV)

The Money week portfolio is picked by highly experienced analysts with a wealth of experience, is publicly available, continuously monitored and offers an instantly diversified portfolio with very little maintenance involved…