Alastair Mundy’s (pictured) Temple Bar IT is the most recent trust to announce a change in mandate to take a more global remit, but Budden, director of marketing and distribution at the fund management company, says that this is just the latest example of a wider trend.
“There is an overall trend toward being more global, definitely,” Budden said.
“There has been a general trend among the big investment trusts. If you look at the changes to benchmarks, in the last 10 years probably all have changed their benchmarks from a heavy UK weighting to a lighter one.”
Budden says the biggest reason for the shift is that investment trusts were previously too closely correlated to the index, and as a result, needed to provide something outside of just index returns. “Why should people invest in investment trusts when you can simply buy a FTSE or MCSI index for not very much?” he said.
Budden says a decade ago the majority of globally-focused investment trusts were heavily UK-centric. However, these trusts were caught out when the tech bubble burst, showing just how much they mirrored their underlying index.
“After the bust in 2002/2003, people realised if these trusts were going to survive, they had to do more than just track the index,” he said.
In fact, when the markets took a tumble in mid-2002, the major investment trusts such as Witan, Foreign & Colonial and Scottish Mortgage all fell in line with the FTSE All Share and continued to track it through the remainder of the year – which Budden says was the catalyst for a change in mandate.
Performance of major investment trusts vs index in 2003
Source: FE Analytics
“It’s more a need to be different. If you’re going to outperform an index, you need to takes bets against the index,” he said.
Dividends
Budden says investment trust managers previously kept the majority of their assets in the UK because it was one of the few markets that were able to provide steady and growing dividends, but this has been changing.
“Income in the past has been a bit of a handcuff because managers and investment trust boards were worried they wouldn’t be able to sustain their income objectives if they moved assets overseas,” he said.
“Companies overseas are now paying more UK-style dividends which allows investment trust managers to look further afield.”
Budden says there is a growth in dividends outside the UK, particularly from companies in Asia.
He adds that the low-growth environment within the UK means managers need to look outside the country to find companies that are growing their dividend.
“We need to find true growth companies,” he said. “And it’s quite difficult to find those companies locally.”
The director says that one of Baillie Gifford’s flagship trusts – Scottish Mortgage – changed its mandate years ago to adopt a global style.
He adds that major trusts Witan and Foreign & Colonial changed their objective as well, the former opting to go for a multi-manager approach, while F&C took a wider geographical spread.
More recently, Allianz changed the way their Brunner Investment Trust was run to open up its investment universe. The company now invests in both UK and international securities.
“You can buy indexes so cheaply that these trusts have to be offering something more than that,” Budden said.
Scottish Mortgage
Budden says manager James Anderson (pictured) on the Scottish Mortgage IT calls the vehicle “resolutely global” because it is not tied to any underlying index or benchmark. “The geographical weightings just reflect the bottom-up stockpicking view,” he said.
According to FE Analytics data, Scottish Mortgage has great success from its shift of focus since the tech bubble burst, massively outperforming the FTSE All Share.
The investment company – now benchmarked against the FTSE World index – outperformed the FTSE All Share by more than 100 percentage points.
Both the Witan and Foreign & Colonial ITs have outperformed the FTSE All Share, but by less than 30 percentage points over the last decade. They have also hugged the index over the last 10 years.
Over the last decade, the Scottish Mortgage trust has made 321.85 per cent, while the FTSE World Index gained just 159.12 per cent – albeit with more volatility.
Performance of trust vs index over 10 yrs
Source: FE Analytics
The trust is fairly evenly split between North American and continental Europe as its top weightings, with 30.7 per cent in North American and 27.6 per cent in Europe.
Asia Pacific is the next highest weighting, at 16.6 per cent. The trust holds just 13.1 per cent in the UK.
Among the trust’s top holdings are US ecommerce giant Amazon.com, Chinese web services company Baidu and Spanish multinational clothing company Industria de Diseno Textil – or Inditex.
According to the AIC, the trust is trading on a discount of 4.5 per cent with 15 per cent gearing. It is currently yielding 1.7 per cent and had ongoing charges of 0.51 per cent.