Five investment trusts to watch 2023

City of London

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City of London aims to provide long-term growth in income and capital by mainly investing in large UK companies.

The trust is known as one of the Association of Investment Companies (AIC) Dividend Heroes – it’s managed to grow its dividend for more than 50 years. So far, it’s managed to increase dividends paid to investors for 56 consecutive years, though this isn’t a reliable guide to future income. Dividends are not guaranteed.

While Job Curtis, the trust’s manager, hasn’t been at the helm for quite that long, he does boast a long track record. He’s managed the trust since July 1991 and works within a well-resourced and experienced team at Janus Henderson.

Curtis looks for quality, well-managed companies, chosen because he believes they’ll regularly add to the trust’s income pay-out. Though income, like returns, aren’t guaranteed. The manager can also use derivatives, which can add risk. He looks for companies that make plenty of cash, and are conservatively run, in his view.

The UK has faced further headwinds in 2022, not least due to rising inflation and ongoing political upheaval. That said, the FTSE 100, which features the biggest dividend payers in the UK market, has held up better than most global markets, partly helped by stronger returns from sectors including oil & gas and healthcare.

The UK is out of favour with many investors, but we expect it to remain a place for income over the long run. There is some evidence UK companies look better value than other global markets after many years of being in the doldrums, though that doesn’t mean we won’t see further volatility in markets.

This trust could be considered for a portfolio designed for income, looking to add investment to UK companies. Or to bring diversification to a portfolio focussed on capital growth.

F&C Investment Trust

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As part of an investment portfolio aiming for long-term growth, a globally diversified trust could be a good choice.

F&C Investment Trust is run by Paul Niven, an experienced investor and head of BMO’s Multi-Asset Portfolio Management. He aims to grow income and capital over the longer term by investing in companies from around the globe. Developed markets like the US, Europe, the UK, and Japan are the primary focus, but it also invests in some higher-risk emerging markets.

The manager also invests in some early-stage private companies. The rewards can be attractive, but by nature these are higher risk since they can be harder to buy and sell – meaning they are less liquid. The manager can also use derivatives which adds risk.

Niven is responsible for guiding the asset allocation of the trust, which means he decides how much to invest in regions and managing the level of risk the trust takes. The trust is divided into different segments, each with their own dedicated manager. Each manager has different strengths, styles and areas of focus which are blended and monitored closely.

His framework centres around ‘four pillars’: economy, policy, valuation and behavioural factors. For example, key economic indicators such as inflation and economic growth rates are monitored for different regions. Niven and his team then assess how expensive or cheap (a measure of value) each region is compared to its history and other similar markets. Finally, they assess how sentiment is changing towards each region.

Tapping into all corners of the market, the trust could add diversification to a portfolio focused on income or both income and growth, or it could be used to add international investments to a UK-focused portfolio.

Geographic Asset Allocation

Personal Assets Trust

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Personal Assets Trust is managed by Sebastian Lyon, founder of Troy Asset Management. With this trust he aims to grow investors' money steadily over the long run, while limiting losses when markets fall.

Lyon does this by investing in a mix of assets. He focuses on the shares of well-established US and UK companies he thinks offer reliable earnings and good growth potential. The rest of the trust invests in UK government bonds, US inflation-linked bonds - which could provide some shelter from rising inflation - gold and cash. The cash and gold could help provide some stability when economic and stock market conditions are tougher. Typically, we expect the trust to lag a market rally, but offer some shelter in a downturn. As with any investment, this is not guaranteed.

Although the trust hasn’t had much exposure for several years, the manager does have the freedom to invest in higher-risk smaller companies. The trust has the flexibility to use gearing (borrowing to invest) but doesn’t tend to as the manager believes it goes against the core principle of sheltering assets.

Overall, the trust tries to experience less ups and downs than the broader global stock market or a portfolio that's mainly invested in shares. As a result, it could form part of the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.

INVESTMENTS BY ASSET TYPE

Ruffer Investment Company

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Ruffer Investment Company also takes a total return approach to investing – it aims for some long-term growth, while offering some shelter during tough times for markets.

Ruffer uses a team-based approach and considers broader economic conditions to decide where to invest and how much risk to take. The key building blocks used by the trust include global company shares, conventional and index-linked government bonds, cash, and commodities, such as gold. The managers also use some less conventional investment strategies, with the aim of providing some shelter to the portfolio. These strategies have tended to help during times of market stress but can be complicated and are a higher-risk part of the trust.

The team at Ruffer currently has a cautious outlook for markets, and therefore in 2022 investments in shares were reduced. Investments in short-dated bonds (which tend to be less sensitive to changes in interest rates than longer-dated bonds), US treasuries and UK gilts (government bonds) were increased.

The managers are flexible in their approach and can be active in changing the way the trust’s invested. This means they may act quickly in making changes to the trust based on their views and outlook, but economic calls can be hard to get right, and they won’t necessarily get it right every time. They have the ability to use derivatives, which if used adds risk.

We expect the trust to provide some stability to a broader investment portfolio if market conditions remain uncertain. The trust could provide long-term growth, though it’s likely not to keep up with rapidly rising markets.

Securities Trust of Scotland

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Securities Trust of Scotland aims to deliver long-term income and capital growth. James Harries, the trust’s manager, aims to grow the income sustainably over time rather than seeking higher but potentially unreliable yields and focuses on high-quality companies.

Harries believes investing for income globally is optimal as it provides a broader hunting ground than one country or region. That’s why this trust invests in dividend-paying companies from across the globe. While the manager can invest anywhere in the world, he tends to favour developed markets, such as the US, Europe, and the UK. Although he can invest in higher-risk emerging markets, he tends to avoid them, preferring companies that sometimes sell their products in these regions.

The manager takes a relatively conservative approach to investing. His focus on high-quality companies means the trust could hold up better than the broader global market when it’s falling, though it may lag the market when it rises quickly.

This is a concentrated portfolio of between 30-50 holdings. That means each company can have a significant impact on performance. The manager can also use derivatives. Both these factors can add risk.

Given its focus on quality, this trust could work well alongside other investments in out-of-favour companies with recovery potential – also known as ‘value’ investing. It could also complement those targeting greater growth that don’t tend to pay dividends. Its global reach may also add diversification to an income-focused portfolio.

Geographic Asset Allocation

Source: Securities Trust of Scotland, October 2022