The benefits of highly-diversified investment trustsThursday, 07 February 2019
The space includes Alliance Trust, F&C Investment Trust, Herald and Witan
Given the return of equity market volatility, the threat to global growth from trade wars as well as political uncertainties, portfolio diversification should be front of mind for the savvy investor and there is plenty on offer in the investment trust space.
Investors can put money to work with funds that not only produce growth and income, but also provide a less rocky ride during times of market strife. The diversity of their underlying portfolios means that if one investment hurts, the wider portfolio doesn’t take a big performance hit.
Highly-diversified trusts include Witan (WTAN), offering investors broad exposure to global equities
via a multi-manager strategy and whose 2018 results should confirm a 44th consecutive annual dividend hike.
Witan’s funds are allocated to 10 external managers and up to 12.5% is directly invested in specialist funds and smaller, niche managers. Top holdings range from consumer goods powerhouse Unilever (ULVR) and Lloyds Banking (LLOY) to listed life sciences fund Syncona (SYNC).
In combining different investment approaches and geographical mandates, Witan recognises that no manager will excel in all market conditions and regions. It is hoped the Witan way should reduce performance variability relative to using a single manager.
MORE EXAMPLES OF DIVERSIFIED TRUSTS
Bankers Investment Trust (BNKR) has a diversified portfolio of 196 stocks as at 31 December, whose top 10 investments speak for a mere 16% of the total portfolio. Besides geographical diversification, Bankers is highly diversified at the sector level. Managed by Alex Crooke, who takes responsibility for the
allocation to seven regional portfolio managers, Bankers, like Witan, boasts 52 years of consecutive dividend increases under its belt. Other trusts with diversified portfolios include multi-manager collective Alliance Trust (ATST) and Herald Investment Trust (HRI), the tech, communications and multi-media investor flush with 285 holdings at last count.
But the big daddy when it comes to diversification is F&C Investment Trust (FCIT). Having been through over a century and a half of market ups and downs – 2018 marked the trust’s 150 year anniversary and it has flourished despite two world wars, the great depression and 2008’s global financial crisis – the world’s oldest collective investment fund knows how to navigate current choppy market conditions.
UNDER THE BONNET OF F&C
F&C Investment Trust’s diversified portfolio provides exposure to most of the world markets. Like Witan and Alliance Trust, it is a multi-manager fund – for example, the US fund component is managed by external managers T Rowe Price and Barrow Hanley – offering diversified, low cost exposure to more than 500 companies in 35 countries.
This staggering diversity should theoretically help it smooth out the ups and downs of the market and also makes it a suitable building block for a beginner’s portfolio.
As of 31 December 2018, the 20 largest holdings included Amazon, Microsoft, Boeing, JPMorgan Chase and Facebook.
Crucially, the investment trust boasts a stellar track record, having generated 10 year annualised total price and net asset value returns of 14.5% and 13.08% respectively, according to Morningstar.
Manager Paul Niven is tasked with finding the right blend between different strategies. He ensures the portfolio offers broad-brush exposure to a combination of global stock market giants, rising star companies in developing economies and private equity opportunities too.
FIT FOR THE FUTURE
Niven explains the trust’s longterm objective is to grow capital and income. ‘The trust has adapted through time to make sure we are fit for purpose,’ he informs Shares.
He says the trust’s original objective was to provide the man or woman of moderate means access to the same opportunities as large capitalists.
‘We started out in 1868 investing in emerging market bonds. We invested in private equity in 1942 and really went wholesale into equities in the 1960s. That is probably the biggest decision the trust has made over the last 150 years. If they hadn’t made that move, obviously the 1970s and inflation came along and bond markets got killed.’
The trust has paid a dividend every year for 150 years and paid a rising dividend in every one of the last 47 years.
He hammers home the point that F&C Investment Trust sees ‘growth assets’ as the place to put money to work in today’s world. ‘We’ve grown our capital returns and total returns for shareholders materially. Because we’re focused on capital and income, we don’t chase income for its own sake.’
Niven adds: ‘We seek to provide a one-stop shop for investors that are looking for a global growth solution. We think it is appropriate to be diversified. I think focused portfolios make a lot of sense, but for the end investor, there needs to be a bunch of focused portfolios which combine in an appropriate way to deliver performance. I wouldn’t bet the ranch on one particular style or approach.’
His approach is to blend a range of different strategies in its portfolio. ‘If you look at our return against risk, we score very favourably against the competition. We give quite a smooth performance journey with less surprises than you might get if you buy a single, focused portfolio.
By James Crux, Funds and Investment Trusts Editor, Shares. First published 7th February 2019