Stability and consistency support returns at the world’s oldest investment trust

MoneyWeek has always believed investment trusts are one of the best assets to own to protect and grow your wealth. 

Trusts are structured in a way that allows them to take a longer-term view of the markets, and this, in turn, lends itself to less portfolio turnover, lower costs and more often than not, better returns for investors. 

The benefits of the investment trust structure 

Investment trusts are closed-ended vehicles, which means they don’t have to worry about daily investor withdrawals. 

On the other hand, open-ended funds do have to worry about flighty investors, and, therefore, tend to chase short-term performance rather than long-term wealth creation. Trusts can focus on the long-term potential of underlying businesses, not short-term share price performance. 

What’s more, unlike open-ended investment funds, the trust corporate structure has more dividend flexibility. 

Closed-ended trusts don’t have to pay out all the income they receive from their portfolios every year. They can tuck 15% of their annual portfolio income back into a revenue reserve and then deploy this reserve when income from the investment portfolio falls short. 

Some trusts have been able to build up several years’ revenue reserve as a result, allowing them to cover dividends during periods of market volatility and build enviable dividend records. 

Trusts can also borrow money to invest. If used sensibly, debt can help increase returns especially if money is borrowed at a low fixed rate over a period of many years. While this can enhance returns to investors in a rising market, borrowing to invest can be a risky strategy, because if the market falls the losses may be greater.

A Dividend Hero  

Eight investment trusts have been paying and increasing their dividends for more than 50 years, according to the Association of Investment Companies (AIC). 

Any trust with a 20+ year track record of consistently increasing their dividends is awarded “Dividend Hero” status by the AIC. 

The F&C Investment Trust is one such trust. 

Founded in 1868, it is the oldest investment trust in the world with more than 150 years of investment history. It’s also an AIC Dividend Hero with a 52-year track record of continual dividend increases (only two other trusts with the same mandate have a longer track record).

And F&C has plenty of reserves to maintain this track record. At the end of June 2022, its revenue reserve represented just over one year of annual dividends. The trust increased its full-year 2021 dividend by 5.8% even though revenue fell short by dipping into its revenue reserve, which shows how useful this resource can be for shareholders. With investing there are no guarantees and dividend payments may not continue to increase.

The trust’s goal is the same today as it was when it was first launched - to act as a solid foundation for any portfolio for investors of any experience. 

One of its ambitions at launch was also to make investing more accessible. It’s keeping this ambition alive today with new and existing investors able to invest with as little as £25 per month through a Columbia Threadneedle Savings Plan.

A defensive and diverse portfolio

F&C’s portfolio is different to other equity investment trusts as it invests using multiple different strategy buckets. These include regional investment strategies, such as North America and Japan, alongside thematic strategies such as its Global Income basket. Within these buckets, the trust focuses on strong businesses, blue-chip household names, such as Microsoft, GlaxoSmithKline and Amazon. 

In addition, 13% of the portfolio is invested in private equity assets, managed primarily by some big-name investors in the private market such as Pantheon, HarbourVest and Baillie Gifford. 

The overarching goal of the trust’s managers is to manage F&C’s portfolio in a way to maximise returns while limiting volatility and losses.

Indeed, this diversification and differentiation across strategies have helped F&C outperform its benchmark over the past decade. The share price has yielded a total return of 13% per annum over the past 10 years to the end of December 2022, more than 1.5% per annum ahead of its benchmark, the FTSE All World TR Index. Past performance, however, is no guarantee of future returns.

It has achieved this performance at a relatively low cost to investors. Total ongoing charges, as calculated according to AIC recommendations, are 0.54%, a relatively modest amount compared to the rest of the active investment fund universe.

While F&C can borrow to improve its performance (like all trusts), it’s currently running a low level of gearing. Gearing was 3% at the end of January reflecting the manager's view that “markets will remain volatile in the short term.” Still, it has scope to increase borrowing to enhance returns if the economic outlook improves for the better over the coming months. 

Something for everyone 

At a time when the economic outlook is so uncertain, a diverse trust like F&C appears appealing, especially as it has over 150 years of navigating different market conditions. 

The firm’s global portfolio of more than 350 companies gives its a toehold in all major markets, while exposure to non-public assets such as private equity offers scope for non-correlated returns if public markets get spooked.

Investors can pick the trust up today for a slight discount to its net asset value (-1.6%) and it also offers a dividend yield of 1.34%. With its global portfolio and long-term track record, F&C has something for both beginners and seasoned investors. The value of investments can go down as well as up and you may not get back the original amount invested.

Issued by Columbia Threadneedle Investments and approved for distribution 13/03/23. Columbia Threadneedle Investments is the global brand name of the Columbia Threadneedle group of companies. Authorised and regulated in the UK by the Financial Conduct Authority.