Investment trusts F&C and BMO Global Smaller Companies have performed well over the past 10 years, up 228% and 179.3% respectively, yet both are on a large share price discount of 10.7%.
The trusts are both part of the BMO suite of investment trusts. The former is the oldest trust in the world, buying global large-cap stocks, while the latter is the smaller cousin, buying companies with lower market capitalisations.
The similarities do not end with just the asset manager, however. Both have a strong dividend history, with each increasing pay-outs for the past 51 consecutive years. They also invest in a similar way, with a mixture of both individual stocks and other funds and investment trusts in the portfolios.
Despite their excellent track records, neither outperformed their respective benchmarks in the past year, but both made positive returns all the same – F&C was up 9.1% and BMO Global Smaller Companies increased a modest 2.8%.
Total return of trusts over the past 10 years
Source: FE Analytics
They are both popular with investors but which one is the best to go for at the current price? With the same managing company, they share many characteristics but take very different investment approaches according to Tom Sparke, investment director at GDIM.
As its name suggests, the BMO Global Smaller Companies trust invests in small-cap businesses, leading to "a more differentiated allocation”. For example, several top holdings are in Japanese smaller companies, a sector that has been relatively unloved in recent years.
Source: BMO Global Smaller Companies
The Japanese economy has struggled for decades recover from the financial crash of the late 1980s, but industry experts appear confident that recently elected prime minister, Fumio Kishida will continue the reforms of Shinzo Abe to improve corporate governance, which has led to a renaissance in recent years.
Jeff Atherton, manager of the Man GLG Japan Core fund said that he has witnessed “more change in Japan over the past two years than in the past 29 years of my career”.
Overall, the trust is overweight China, which manager Peter Ewins said was showing “some signs of better performance,” although a lot of question marks remain, such as whether the Chinese Communist Party supports or condones Russia’s invasion of Ukraine.
He added that none of the funds targeting emerging markets have any holdings listed in Russia.
On the other hand, Sparke said that F&C allows for "a more traditional geographic outlook" with many holdings in the US and technology stocks, although the poor performance of the sector in recent months has led manager, Paul Niven to reduce allocations in big tech names.
While the fund only had limited exposure in two Russian assets, Niven said that the war in Ukraine is swelling concerns he already had over rising inflation and commodity prices, which could slow financial growth.
Some may argue that the conflict has accelerated the shift in sentiment towards value stocks, as higher prices around the globe have drained momentum from growth-heavy portfolios.
However, it is this large-cap US bias, which accounts for 54.4% of holdings, that tempts Sparke to favour the F&C out of the two, especially as the Global Smaller Companies trust’s large stake in UK equities may lead it to "face more challenges at the present time than many of its peers”.
He said: "Longer-term I would expect the Global Smaller Companies fund to outperform, but in a slowing-growth, higher-inflation environment I think bigger may be better."
Adrian Lowcock, investment expert and independent commentator, agreed that F&C was the better option owing to its diverse portfolio that spreads risk across over 400 holdings.
He said that the large number of assets “blends exposure to both listed and private equity companies, with up to as much as 20% in the latter”.
It also reduces risk by appointing individual managers to monitor the economies, policies, valuations and behaviours of each geographical region.
Lowcock said: “Each region is run by a separate manager who can outsource if there isn’t sufficient expertise in house. This allows the team to tweak their exposure to certain styles as and when necessary.”
With its carefully considered approach and cautious strategy, Lowcock recommended the F&C trust as a core holding in investor’s portfolios.