Broaden your investment horizons with global trusts

Before the millennium, the global investment trusts were a venerable but sleepy and complacent bunch, steadily shrinking in number, stuck in the past.

Typically, half of their assets were invested in the UK, as they had been in the pre-1979 days of exchange controls, but the need to pay a progressive dividend restricted their ability to invest in lower-yielding markets.

Fund management was organised on geographic lines, with specialist teams looking after their part of the portfolio without regard to what others were doing.

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The trusts under-performed global benchmarks and traded on large discounts to asset value.

Thankfully, things are different now.

The best-performing global trusts out there

Steadily, the global investment trust sector has changed and performance improved. An increasing number of trusts are managed by global teams who look for the best investment ideas around the world regardless of their country of listing, which is often an accident of history.

That the UK market includes many companies with a global sales reach is no longer regarded as a sufficient excuse to ignore comparable but better companies listed overseas. This suits investors who, sensibly, do not feel qualified to allocate between regions or sectors and would rather delegate that task to professionals.

With the performance of the leading trusts in the sector now matching or exceeding world indices and their discounts turning to premiums (the shares no longer trade at below the value of the underlying portfolio), investors now have plenty of quality funds to choose from, with the choice improving year by year as the laggards catch up.

The pathfinder in turning “UK-plus” trusts into genuinely global trusts was investment manager Baillie Gifford. The group’s style is to make long-term investments in growth companies, which means maintaining low portfolio turnover, even when investments multiply in value.

Baillie Gifford’s managers seek the relatively small number of highly innovative companies that go from small beginnings to global leadership, arguing that these companies account for the bulk of market returns. Nowadays, these companies are capital-light and therefore see no need to float on the stockmarket early in their development. To access these, the Baillie Gifford trusts are devoting increasing amounts of capital to private equity investment.

The largest of its trusts (and the largest in the market) with £8.8bn of assets is Scottish Mortgage (LSE: SMT). It is the most aggressively growth-orientated of the trusts and has returned 120% in the last five years (all figures are to the end of March 2020), nearly three times the world index. Recent performance has benefited from its backing of Tesla, now its largest holding. Tesla’s eccentric genius of a founder, Elon Musk, made Tesla a controversial stock in 2019, showing that Scottish Mortgage is not merely riding the technology wave. Around 20% of the trust’s assets are invested in 45 private equity holdings.

From the same stable, Monks (LSE: MNKS), with £1.9bn of assets, has a more cautious and diversified portfolio but has still beaten the global index by 20% over five years while the £560m Edinburgh Worldwide (LSE: EWI), 37% ahead over three years, focuses on mid-cap companies that are not yet household names.

Finally, Scottish American (LSE: SAIN), with £570m of assets and returns moderately ahead of the world indices, focuses on yield, paying 3.4%. With 26% of assets in the UK, it is far more domestically orientated than its sister trusts.

Investors are spoiled for choice when it comes to global trusts

F&C (LSE: FCIT), with £3.7bn of assets, and Alliance (LSE: ATST), with £2.5bn, were the slumbering giants of the sector. Investment returns were similar to the market over three and five years but have slipped in the first quarter, resulting in F&C’s premium turning to a discount of 7%, and Alliance’s rising from 5% to 8%.

F&C, founded in 1868 and so the oldest trust in the market, has a huge number of holdings (over 500) and sub-contracts the American half of the portfolio to two specialist managers, but it’s not clear that this has worked. Alliance Trust sub-contracts its management to nine “best-in-class” managers selected by fund specialists Willis Towers Watson.

Witan (LSE: WTAN), with £1.75bn of assets, is also a multi-manager trust, parcelling out 90% of its assets to ten third-party managers. Its performance has lagged, perhaps because it has kept 35% of its assets in the UK and only 24% in North America. However, it has recently reduced its target UK weighting to 15% and the shares yield 3.3% with the shares trading on a 5% discount to net asset value.

RIT (LSE: RCP), the £3bn trust with, until recently, Lord Rothschild at its helm, has enjoyed the most persistent premium to net asset value in the sector, partly because the Rothschild family holding above 20% inspires confidence, partly because of Lord Rothschild’s record for shrewd dealing, and partly because the trust has a long-term record of enjoying much of the upside of the market while limiting the downside. Performance had been somewhat disappointing in recent years but it has negotiated the recent market crash well, which makes a current discount above 5% good value.

There is also value in another family controlled trust, Caledonia (LSE: CLDN), which has generated returns close to RIT over three and five years, yet trades on a 27% discount to net asset value, perhaps because the Cayzer family are not credited with the Midas touch of the Rothschilds. Caledonia’s focus is increasingly on private equity while RIT has a diversified multi-asset portfolio.

Some of the smaller trusts are worth a look. The Mid Wynd trust (LSE: MWY) has built up a strong investment record under Artemis while that of Martin Currie Global (LSE: MNP) is very similar. With 87% of its assets in North America, it is a stretch to describe Manchester & London (LSE: MNL) as a global trust, but its 40% out-performance over three years from growth investing is impressive.

Those who believe that it is time to switch to value should take a look at Scottish Investment Trust (LSE: SCIN) though AVI Global (formerly British Empire) (LSE: AGT), with a much subtler focus on value, has seen improved performance since a change in manager in 2015. Personal Assets (LSE: PNL) has always performed well in bear markets and did so again in the first quarter but will probably return to being the tortoise of the sector as markets recover.

The highest yielding global trust is Murray International (LSE: MYI) at 6.2% but it has over 50% of its assets in Asia and emerging markets. If the dull performance of these regions in recent years heralds an opportunity, this is a plus but sceptics might prefer the much smaller JP Morgan Global Growth & Income (LSE: JGGI), yielding 4.5% (mostly paid out of capital) but with a performance record second only to Scottish American among the six global equity income trusts.

Bankers (LSE: BNKR), with over £1bn of assets, may only yield 2.5%, but the dividend is comfortably covered by earnings and has been increased in each of the last 53 years. A three-year performance ahead of the global index – despite an unhelpful bias to the UK (24% of assets) – is impressive.

Global funds should account for a significant chunk of any investment trust portfolio and most have withstood the market’s recent baptism of fire well. Nearly all can be bought more cheaply than at the start of the year but the stronger performers should prove to be the better investments. Investors are now spoiled for choice.