While many of the oldest funds in the open-ended sector can trace their history back to the 1960s, a significant number of their closed-ended peers have been around for much longer.
February 2019 marks the 130th birthday of three investment companies: Merchants, BMO Global Smaller Companies and British Empire, but how have they done it?
Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), said that considering the increased focus on short-term returns, it is reassuring to see these trusts celebrating such a milestone this month.
“As an investor it’s comforting to know that an investment company may have been around for decades, or in many cases over a century, serving generations of investors through market ups and downs,” she said.
“These investment companies launched in 1889, the same year that the Eiffel Tower opened and van Gogh painted his Starry Night, and are still meeting investors’ needs today and that’s a considerable achievement.”
Here we find out what has allowed these three trusts to stand the test of time.
The Merchants Trust was originally formed to finance the North American railway boom and other opportunities elsewhere around the world, but it has evolved over the years and now invests solely in UK companies.
However, manager Simon Gergel points out that many British companies are multinational businesses, with the majority of underlying sales and profits for Merchants’ holdings still coming from abroad.
The trust’s objective is to provide an above-average level of income and income growth, together with long-term growth of capital, through a policy of investing mainly in higher yielding UK large-cap companies.
“Generating a high income has always been part of Merchants’ DNA, long before DNA was discovered, and we are proud to have been able to raise the ordinary dividend for the last 36 years,” said Gergel.
Winterflood said Gergel’s investment approach has a contrarian, value focus, driven by fundamental analysis, adding: “Although the manager has a value focus, this does not preclude the inclusion of growth companies as he does not see the two as mutually exclusive.”
Looking forward, Gergel is relatively sanguine about the threats facing the market, pointing out that with the trust having survived two world wars, the Great Depression, the global financial crisis and the 1970s inflationary shock, “somehow today’s uncertainties over Brexit and Donald Trump’s trade spat with China don’t seem so threatening”.
Data from FE Analytics shows Merchants has made 193.42 per cent over the past decade, compared with 200.61 per cent from the IT UK Equity Income sector and 157.82 per cent from the FTSE All Share.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
It is yielding 5.47 per cent and is on a discount to net asset value (NAV) of 0.56 per cent, compared with 3.12 and 5.07 per cent from its one- and three-year averages.
The trust has ongoing charges of 0.59 per cent and is 23 per cent geared.
British Empire Trust was incorporated in London in 1889 as The Transvaal Mortgage, Loan and Finance Company Limited, with the aim of investing in the hot emerging market opportunity of the period – the Transvaal colony of southern Africa, a region rich in minerals and resources.
It is now a globally diversified investment trust with nearly £1bn in assets and has been managed by Asset Value Investors (AVI) since 1985.
Manager Joe Bauernfreund said the trust follows a unique strategy of investing in asset-backed companies, including holding companies, closed-ended funds, property companies and, “as of June 2017, cash-rich Japanese companies”.
“The AVI approach focuses on benchmark-agnostic, bottom-up stockpicking, with an emphasis on finding companies with attractive assets trading on a discount to a conservative estimate of net asset value,” he added.
The team also attempts to identify catalysts which may help to close the gap between the share price and the NAV.
“In many cases, AVI engages constructively with the management and boards of its holdings in order to provide expertise and suggestions on bringing in the discount,” Bauernfreund added.
Data from FE Analytics shows British Empire has made 154.76 per cent over the past 10 years, compared with 255.43 per cent from its IT Global sector and 144.74 per cent from its MSCI ACWI ex USA benchmark.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
The trust is trading at a discount to NAV of 8.25 per cent, compared with 9.51 and 10.44 per cent from its one- and three-year averages.
It has ongoing charges of 0.87 per cent and is 11 per cent geared.
BMO Global Smaller Companies started life as the Alliance Investment Company in 1889, with initial share capital of just £1m. It originally invested mainly in overseas government bonds, like many of the early investment trusts, but in 1975 the board decided to focus on smaller company equities.
Given the strong performance of small caps in recent decades, this was an astute move and the market capitalisation of the trust ended 2018 at £737m.
The trust’s manager Peter Ewins said its asset allocation has become progressively more international since 1975, with the UK now accounting for just one quarter of assets.
“Our team looks for the best smaller company opportunities from around the world wherever they may be and we have also used third party funds to gain exposure to markets in Asia and Latin America for more than a decade,” he said.
“In the same way that the trust has a proud long-term record, we seek to focus our own investing around companies with demonstrable track records of their own and good growth potential, run by strong management teams.”
Ewins added that the closed-ended structure of BMO Global Smaller Companies allows it to build stakes in some of the least liquid stocks, giving it an advantage over open-ended funds, as this can be where valuation anomalies are most attractive.
In terms of his outlook, the manager said it is difficult to call in the near future given the geopolitical uncertainties which have weighed on sentiment.
However, he said that while he is cautious on short-term earnings trends given the recent globally synchronised weakening of macroeconomic data, valuations now look less stretched for many stocks, provided the world economy performs broadly as expected in the coming period.
“We presently have an overweight stance to Japan and Europe, while we are underweight in the UK as the political scene remains uncertain,” he finished.
The trust has made 401.59 per cent over the past decade, compared with gains of 262.14 per cent from its benchmark, split 70/30 between the MSCI World ex UK Small Cap and Numis UK Smaller Companies indices, respectively, and 255.43 per cent from the IT Global sector.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
BMO Global Smaller Companies is on a discount of 1.9 per cent compared with 1.39 and 0.34 per cent from its one- and three-year averages.
It has ongoing charges of 0.83 per cent and is 4 per cent geared.