In 2026, the FTSE 100 index is likely to pass 10,000 for the first time thanks to the onward march of corporate earnings around the globe. UK investors have been remarkably reluctant to invest despite the relentless rise of equity markets: two-thirds of all ISA savings are in cash ISAs, and two-thirds of savers believe that investing is too risky.
With investors starting to discount a change to a more business- and stock market-friendly government, savers’ risk aversion should start to decline, even if the domestic economic outlook remains dismal and fears of a fiscal crisis are widespread.
Investment trusts tend to outperform a rising market, especially when, as now, there is scope for discounts to net asset value (NAV) to fall. They currently average more than 14%. Savers, whose real returns are being squeezed between falling interest rates and persistent inflation, need to cast aside their regret about missed opportunities and take the plunge. Fear about short-term volatility should not be a deterrent to the long-term returns that equity markets offer.
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Where to start with UK equities
A good place to start is with the MoneyWeek portfolio, which includes two contrasting, but complementary investment trusts: the £13 billion Scottish Mortgage Investment Trust (LSE: SMT) and the £1 billion AVI Global Trust (LSE: AGT). Both invest globally, but SMT is very much a growth trust while AGT invests in value.
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The five-year investment record of SMT is miserable at 27% against a 75% return from the MSCI All Country World index. But this includes the disastrous year to June 2022 when NAV fell 39% and the share price 46%, while the index fell less than 5%. This followed five years in which the NAV more than quadrupled while the index less than doubled, arguably making the managers overconfident.
After reaching a low in May 2023, both the NAV and the share price started to recover. The share price has almost doubled since then, helped by a narrowing discount to NAV as SMT has aggressively bought back shares. In the year to 31 August, both the share price and the NAV have returned 34%, compared with just 13% for the index, but the shares still trade on an 8% discount to NAV.
AGT has charted a much steadier course, with an investment performance of 90% over five years, but only a respectable 12% over one. The share price dropped 15%-20% in a couple of months earlier this year, but its moderate overall volatility and good performance explain the 6% discount to NAV at which the shares trade.
SMT “aims to identify, own and support the world’s most exceptional growth companies”. It recognises that many of these are not quoted, because private capital is more readily available than in the past, so companies are coming to the market later in their development. It believes that great opportunities would be missed or invested in unnecessarily late if it restricted itself to public equity. Private equity is limited to 30% of the portfolio, and this limit was a problem in 2021-2022 when the share prices of its quoted company holdings fell fast, and a widening discount of its shares to NAV resulted in pressure to buy back shares. Now, private equity comprises 26%, invested in 51 companies. This includes Space Exploration Technologies, the largest holding at 7.8%, Elon Musk’s venture that includes Starlink.
Also unquoted is ByteDance, the owner of TikTok and the sixth-largest holding at 3.5% of the portfolio. The remaining 73% of the £15 billion portfolio, excluding 1% of net liquid assets, is in 47 listed holdings, the largest of which are MercadoLibre, Amazon, Taiwan Semiconductor and Meta. Borrowings of £1.6 billion, 11% of net assets, imply optimism about the outlook, but will also constrain further investment.
Contrasting investment trusts
Portfolio turnover, at 9%, is low; SMT’s philosophy is to run its winners. It has multiplied its money 100-fold in Nvidia (a top-10 holding) and 21-fold in Tesla (now sub-1%). But it owns up to seven investments in the last decade, on which it has lost everything. Its managers note that you can multiply your money on a good investment, but only lose it once on a bad one.
AGT’s expectations on each investment are much more modest on the upside and much less phlegmatic on the downside. Its approach to value is very different from just seeking cheap or recovery shares around the world. Around 40% of the portfolio is invested in holding companies, usually family-controlled, where the whole is valued at much less than the sum of the parts. Examples include the media and entertainments groups News Corp, controlled by the Murdoch family, and Vivendi, controlled by Vincent Bolloré.
There is significant underlying growth in these companies, but investors suspect the controlling shareholders of being empire builders rather than value creators, hence their undervaluation. Another 31% of the portfolio is invested in closed-end funds trading on significant discounts to NAV, such as Chrysalis, Oakley and HarbourVest (all private-equity specialists). Again, there is significant underlying growth in these investments, but investors are sceptical.
The final 29% of the portfolio is invested in Japan (21%), Korea (6%) and property/other (2%). AGT saw a significant opportunity in Japan around 10 years ago with a large number of companies trading at very low valuations relative to assets, and their managements both complacent and uninterested in outside investors.
Prime minister Shinzo Abe (2012-2020) introduced reforms to shake up the corporate sector and these slowly bore fruit. In 2018, AVI launched a separate trust, AJOT, to specialise in value investing in Japan, but Japan has continued to be an important and successful focus for AGT. This year, Korea introduced similar corporate reforms, which encouraged AGT to invest there. It has identified 600 companies trading at a median price-to-book ratio of 0.7 and a median of 71% of their valuation in cash and listed securities, so the opportunity is significant.
Why pick both investment trusts?
AGT is not a traditional activist investor. Rather than a hostile approach in a blaze of publicity, it seeks to persuade company managements to realise value for shareholders. It is prepared to write open letters to management, to engage with other shareholders and to be patient, although a 36% gain after four months of holding Jardine Matheson shows that this is not always necessary.
AGT’s debt-to-net-asset ratio of 9% is similar to SMT’s, but only 16% of the portfolio is invested in North America, compared with 55% for SMT. Its portfolio is much less technology-orientated than SMT’s, but much more growth-orientated than a traditional “value” portfolio. AGT and SMT can be compared to the tortoise and the hare, but unlike in Aesop’s fable it’s not clear who the long-term winner will be. Markets and momentum now favour SMT, while AGT progresses steadily – but fortunes can change. That is why MoneyWeek’s investment-trust portfolio contains both.
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