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Top trusts you can put faith in By Jeff Salway
Since reaching dizzy heights in 2000, the sector has suffered from poor performance and a tarnished reputation. But when stockmarkets are robust, investment trusts are the place to be. In the three years to December 2006, the average Crucially for investors, this upturn in fortunes hasn't come with a rise in costs. In fact, according to research from the Association of Investment Companies, charges - specifically total expense ratios (TERs) - have fallen in the last couple of years. Nearly 30% of investment trusts charge less than 1%, and 59% levy less than 1.5%, whereas it's common for unit trusts to have TERs in excess of 2%, and some over 3%. Given that charges can seriously erode returns over the long term, these seemingly small figures can make a huge difference to investors. For example, a £10,000 investment growing by 7% each year in a fund with a TER of 1.5% would reach £17,081 after 10 years, but only £14,800 with a TER of 3%. Raising the level of confidence Despite this, many investors remain nervous of investment trusts. The individual funds and managers have a lower profile than those of unit trusts, and the 315 trusts (the UK All Companies unit trust category alone has more funds) are worth £86.6 billion, a fraction of the amount managed by their open-ended counterparts. In many ways, the sector is still suffering the after effects of the split caps mis-selling scandal of 2002. But investment trusts are taking steps to make those wary investors more confident about the sector. Historically, discounts have had the potential to widen significantly, meaning that if you bought your shares at, say, a 5% discount and the discount was then widened, you would lose out. Recently, wide discounts have become less commonplace, partly because trusts have introduced ways of managing them. For example, the board of Walker's Martin Currie Portfolio Trust (MNP) offers to buy shares back from shareholders if the average discount excess is 7.5%, and other trusts have introduced similar discount-management mechanisms. In all, discounts in 2006 averaged a stable 6%, helping reassure investors about the stability of the sector. Another growing trend is that the geographical location of companies is becoming less meaningful. Increasingly, investing in a UK company doesn't mean investing only in the UK economy, as companies become increasingly diversified and are influenced by non-UK factors. In terms of performance, the best sectors over the last year or so have been the global growth, UK income, and emerging markets sectors. The popularity of the latter reflects a growing risk appetite among investors. This has been driven by low interest rates, which have fuelled the mergers and acquisitions and private equity activity that's been behind much of the UK stockmarket growth over the last three years. But, as with any equity-based investment, their inherent volatility makes picking the right investment trust for your needs absolutely vital. Trusts that produce the most consistent returns without heart-stopping unpredictability: UK Growth and Income The Lowland Investment Company (LWI), a Henderson Global Investors trust run by James Henderson, has consistently beaten its peer group and the FTSE All Share index, making it a favourite with advisers. The Finsbury Growth and Income Trust (FGT) is different to most of its peers in style. Manager Nick Train is unusual in that he generally holds the small number of stocks in the portfolio for between five and 10 years in the belief that they are outstanding companies that will pay off in the long run. UK Growth The Albany Investment Trust (ABNY) run by Rathbones, is a relatively concentrated trust of 45 stocks. Manager Andrew Morris invests around 40% of the fund in large companies and 35% in medium-sized firms without gearing, further limiting the potential for volatility. Invesco's Keystone Investment Trust (KIT) is also a relatively low-risk trust compared with many in the sector. Its manager, Mark Barnett, continues to produce consistently good performance and it's a good value trust for investors as its still on a 10% discount to its NAV, although gearing is high at 23%. UK Smaller Companies Standard Life's Edinburgh Small Companies Trust (EFS), is in good hands under the management of the highly regarded Harry Nimmo. The trust survived a winding-up vote last year and is going through a major restructure. AXA Framlington's Innovative Growth Trust (FIT) managed since 1992 by Brian Watson, focuses on the smaller end of the small cap market, says Tim Cockerill. European JP Morgan European Investment Trust (JETI) managed by Stephen Macklow-Smith and Alexander Fitzalan Howard. It's a fairly mainstream European trust but with a flexibility that allows it to benefit from exposure to the thriving European small companies environment. TR European Growth Trust (TRG), has built up a solid long-term track record and a good reputation as a stockpicker. Far East Excluding Japan Baillie Gifford's Pacific Horizon Investment Trust (PHI), managed by Gerald Smith stands head and shoulders above others in the sector and it's exposure to Hong Kong has probably been the main driver of this performance. The Schroder Asia Pacific (SDP) has been less spectacular, but all of our judges recommend it as a quality core holding for Far East exposure. Although he's based in London, manager Matthew Dobbs has strong Far East experience and benefits from a strong Schroders presence in the region. Specialist The experience of manager Gervais Williams has enabled Gartmore Irish Growth (GIR) to take full advantage of the flourishing Irish economy. It's a concentrated portfolio, as the 35 undervalued stocks are drawn from a universe of little more than 100 companies. TR Property Investment Trust (TRY), run by Thames River, is one of the broader funds in the sector, in terms of regional spread, as it invests in property companies across Europe. Global The SVM Global fund (SVG) is an unconstrained fund of funds trust that looks for the best opportunities on a global basis. Jupiter's Primadonna Growth Trust (JPG), is also fairly unconventional, in that it invests in a mix of funds and companies, while for a global fund it also has high exposure to UK stocks.
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