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The investment vehicles that have ruled for longer than the Queen

  • 36 investment trusts still going today pre-date the Queen’s accession to the throne
  • Some investment trusts have had double platinum jubilees
  • But the reign of investment trusts has been usurped by unit trusts
  • Investment trusts v unit trusts- which are better for investors?

Laith Khalaf, head of investment analysis at AJ Bell, comments:

 “Seventy years and counting is a pretty good innings for a monarch, but for some investment trusts, it’s only half the time they have been in existence. The UK investment trust industry can chart its history back to 1868, when Queen Victoria sat on the throne, and Foreign and Colonial Investment trust was launched. The trust is still going strong today, having witnessed the reign of six British monarchs, though it’s investment focus is now global shares, rather than the overseas government bonds it held at launch.

“In total, 36 investment trusts have been around since before Queen Elizabeth II acceded to the throne, including well-known trusts like Scottish Mortgage (launched 1909), City of London (1888) and Bankers trust (1888), though names and investment mandates may have changed over the years. Many of the first investment trusts were created in Scotland to house the wealth created by the jute boom in the latter half of the nineteenth century, and a good number retain their Scottish heritage through their names and their management today.

“Despite its longevity, the investment trust industry’s primacy has been usurped by a relatively young pretender in the form of unit trusts. The first such fund was launched by M&G in 1931, and today open-ended funds account for around £1.5 trillion of investment, compared to around £270 billion from investment trusts.

“Of course, the closed-ended nature of investment trusts limits their size compared to their open-ended cousins. Consider that after 150 years, the F&C Investment Trust is one of the biggest in the market, with assets of £5.6 billion, while the open-ended Fundsmith Equity is worth £25.5 billion, a little over a decade since it was launched.

“The following list shows the 36 investment trusts that have been going since before Queen Elizabeth II acceded to the throne in 1952. The five oldest have already celebrated double platinum jubilees (having been in existence for more than 140 years). Also included is the performance over the last twenty years, since the Queen’s Golden Jubilee Year. (Unfortunately aggregated performance data stretching back to 1952 is not available).”

 

Trust

Inception Date

AIC Sector

20 year return %

F&C Investment Trust Ord

19/03/1868

Global

427.4

Investment Company Ord

14/11/1868

Flexible Investment

174.1

Dunedin Income Growth Ord

01/02/1873

UK Equity Income

165.0

Scottish American Ord

31/03/1873

Global Equity Income

332.7

JPMorgan American Ord

18/06/1881

North America

562.2

Mercantile Ord

08/12/1884

UK All Companies

470.2

JPMorgan Global Growth & Income Ord

21/04/1887

Global Equity Income

485.9

Scottish Investment Trust Ord

27/07/1887

Global

233.7

Henderson Smaller Companies Ord

16/12/1887

UK Smaller Companies

588.0

Bankers Ord

13/04/1888

Global

424.5

Alliance Trust Ord

21/04/1888

Global

349.6

BMO Global Smaller Companies Ord

15/02/1889

Global Smaller Companies

679.3

Merchants Trust Ord

16/02/1889

UK Equity Income

243.8

Edinburgh Investment Ord

01/03/1889

UK Equity Income

204.0

AVI Global Trust Ord

01/07/1889

Global

563.9

Law Debenture Corporation Ord

12/12/1889

UK Equity Income

535.4

City of London Ord

01/01/1891

UK Equity Income

268.5

Aberdeen Diversified Income & Growth Ord

05/01/1898

Flexible Investment

106.3

TR Property Ord

05/05/1905

Property Securities

780.8

BlackRock Smaller Companies Ord

02/05/1906

UK Smaller Companies

924.9

Baillie Gifford China Growth Trust Ord

24/01/1907

China / Greater China

182.6

Murray International Ord

18/12/1907

Global Equity Income

505.5

Witan Ord

17/02/1909

Global

314.2

Scottish Mortgage Ord

17/03/1909

Global

1,215.7

Hansa Investment Company Ltd Ord

01/01/1912

Flexible Investment

432.1

Murray Income Trust Ord

07/06/1923

UK Equity Income

226.0

Finsbury Growth & Income Ord

15/01/1926

UK Equity Income

630.1

Temple Bar Ord

24/06/1926

UK Equity Income

279.2

Brunner Ord

01/01/1927

Global

313.5

JPMorgan Japanese Ord

02/08/1927

Japan

137.8

Monks Ord

06/02/1929

Global

419.9

JPMorgan European Growth & Income Ord

15/03/1929

Europe

321.5

Shires Income Ord

31/03/1929

UK Equity Income

158.4

Henderson Far East Income Ord

30/05/1930

Asia Pacific Equity Income

474.9

3i Ord

01/04/1945

Private Equity

683.0

 Source: Morningstar, total return 10/05/2002 to 09/05/2022

Investment trusts v unit trusts- which are better for investors?

Investment trusts and open-ended funds are championed by two different industry groups, which can sometimes lead to a polarised view of these two investment vehicles. But the reality is that investors can happily have a portfolio that includes both, because there are pros and cons to either option, and different investment strategies might lend themselves better to one or the other structure.

Trading

One of the key differences between investment trusts and open-ended funds is that the former are closed-ended, and the latter are open-ended. Open-ended means these funds create or cancel new shares depending on investor demand. In order to do that they typically only issue one price per day, and to deal you would usually have to place your investment instruction the day before, so you don’t know precisely what price you’re going to get.

For long term buy and hold investors, this forward pricing structure shouldn’t make a great deal of difference, because one day’s performance will ultimately be neither here nor there. The fund manager must ensure the price you get is based on the value of the underlying portfolio of securities held in the open-ended fund, give or take the transaction costs involved.

Some investors may prefer investment trusts because there is a live price throughout the day, so you can trade at any point, and you will know exactly what price you’re buying or selling at. That’s because investment trusts are closed-ended, which means the fund manager is investing a fixed pool of money. Shares in the investment trust then trade on the market like ordinary stocks, and investors buy and sell these off each other.

This price can therefore deviate from the value of the underlying portfolio of securities (which is called the Net Asset Value), depending on demand for the investment trust itself. So investment trusts often trade at a discount, or a premium, to the underlying portfolio, and sometimes there can be a significant divergence, especially in distressed markets.

Complexity and risk

Now you may think that if you are buying an investment trust at a discount, you’re getting a bargain, and in a sense you are. But to realise the value of that discount, you would need to be able to sell the trust at the Net Asset Value of the underlying portfolio at some point, and if a trust continually trades at a discount, you may find that is easier said than done. So you do need to take a look at the track record of an investment trust to see what it’s discount has been historically, to gauge whether you’re picking up a good deal.

The same goes for trusts trading at a premium, which shouldn’t necessarily put you off a purchase. Once again though, for long term buy and hold investors, the movement in the discount or premium should be small in comparison to the returns generated by the underlying portfolio.

The existence of a discount and premium does make investment trusts more complex than open-ended funds. It also makes them more volatile, because as well as variation in the price of the underlying portfolio, there is movement in the discount or premium. Investment trusts are riskier than open-ended funds for another reason too; they are able to borrow money to invest, and this is a common practice.

This amplifies returns in the bull markets, but exacerbates losses in downturns, so investors need to be prepared for a bumpier ride with investment trusts. But over the long term, the ability to borrow to invest should mean that investment trusts are able to deliver superior performance. 

Income, illiquids and passive investing

Investment trusts are generally preferable when investing in illiquid assets, like commercial property. That’s because open-ended funds might have to suspend trading if lots of investors leave at once- it’s quite hard to sell an office block or a shopping centre at the drop of a hat to meet large withdrawals from the fund.

Investment trusts can also be useful for income-seekers, because they can keep some dividends back in good years to top up the dividend payments in bad years. There’s no extra dividends generated here compared to an open-ended fund, but this facility can produce a smoother income stream.

There are currently no passive investment trusts available in the UK, following the closure of the Aberdeen UK Tracker Trust in 2017, so for investors who want a simple tracker fund, open-ended funds are the only game in town. The investment trust structure doesn’t really lend itself to index-tracking, as passive investors simply want the market return, which can be distorted in an investment trust by movement in the discount or premium.

Charges

On the whole it’s probably fair to say that large, mainstream investment trusts tend to have lower annual charges than their open-ended counterparts. For instance, in the Global sector, the average annual charge for an active open ended-fund is around 0.9%, but for investment trusts, it’s around 0.6%, according to data from Morningstar.

However, this isn’t universally true, and investors should also be aware that approximately a third of investment trusts carry a performance fee, compared to around 5% of unit trusts. Partly this is down to the fact that a greater proportion of investment trusts offer exposure to more specialist markets, such as unlisted companies.

Investors should compare the specific charges of the funds or trusts they are considering, because there are cheap and expensive examples in both camps. The same goes for the quality of the fund manager, which you shouldn’t lose sight of in all this, because that will be one of the key drivers of your returns, whether you’re investing in investment trusts, or open-ended funds.

 

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