While well-known industry figures such as Mark Dampier, head of research at Hargreaves Lansdown, point to liquidity issues, others highlight the ability for gearing and to trade their shares above and below net asset value as highly attractive.
James Pigott, managing director of Pigotts Investments, says investment trusts are well suited to long-term investing because of their gearing and track record of growing dividends over time.
“This is because over a long period any discount or premium issues tend to be neutralised. Gearing and the increasing dividend payments make a massive difference to performance and are compounding,” he explained.
“The past outperformance over open-ended equivalents speaks volumes and I see no reason for it to change. Even with the drop in fees due to the closing down of the commission pipeline, investment companies have been reducing their fees too, with many simplifying them."
For those looking to buy an investment trust for the first time, we hear from several leading advisers about their favourite trusts.
Mercantile
Robin Keyte, director at Keyte Chartered Financial Planners, recommends the £1.45bn Mercantile investment trust, co-managed by Martin Hudson, Anthony Lynch and Guy Anderson.
The trust has a bias towards UK mid and smaller companies but works well for core UK equity exposure, according to Keyte.
“There are several aspects of this fund that I like. It is presently at a discount to net asset value of 12.8 per cent, offering a potential boost to future returns as the discount closes,” he said.
“It has a dividend yield of 2.8 per cent which is good for a fund mostly exposed to medium sized and smaller companies and helps to keep up with inflation.”
Its high exposure to mid and small caps has meant that, along with other smaller company specialists, it has had a choppy 2014.
However, over the longer term it has stayed ahead of the wider UK equity index.
Mercantile is second quartile – in a sector of 15 members – over three, five and 10 years and has comfortably beaten the FTSE All Share in all of these periods.
According to FE Analytics, over three years it has returned 77.33 per cent compared to an IT UK All Companies sector average of 56.49 per cent and a gain in the FTSE All Share of 39.48 per cent.
Performance of trust, sector and index over 3yrs
Source: FE Analytics
Its largest position is highly contrarian – government outsourcer Serco. The stock has seen a large de-rating of its share price this year, particularly over the past month after it issued a profit warning.
Housebuilders also feature as larger holdings in the portfolio including Barratt and Berkeley, making up approximately 3 per cent of total assets.
Keyte also says he likes the trust because it is substantially cheaper than most OEICs and unit trusts invested in medium sized and smaller companies.
The trust has an OCF of 0.49 per cent and 14 per cent gearing.
Temple Bar
Anna Sofat, managing director of Addidi Wealth, recommends the £788m Temple Bar investment trust due to its long-track record and current price, despite trading slightly higher than its net asset value.
“It isn’t trading at a high premium and I like the fact that with an investment company, a fall or rise in demand leads to a premium or discount on the share price,” she said.
“This gives the client a guide to perhaps how well the fund is doing in the marketplace. Any significant discount can also put pressure on the managers to improve performance. In addition, Temple Bar has an attractive yield at 3.2 per cent.”
Temple Bar has been managed by the highly contrarian Alastair Mundy since October 2002, who also invests in some of the most popular dividend payers such as BAT and Shell.
Since Mundy has run the trust it has not only outperformed the IT UK Equity Income sector and the FTSE All Share, it has also been top quartile for its maximum drawdown and Sharpe ratio.
The trust has returned 331.84 per cent over this time, while the sector average gain was 240.25 per cent and the FTSE All Share rose 197.49 per cent.
Performance of trust vs sector and index over manager tenure
It has and OCF of 0.49 per cent with 14 per cent gearing. The trust is on a premium of 1.4 per cent.
Scottish Mortgage
Pigott and Francis Klonowski of Klonowski & Co both recommend one of the most popular trusts – Scottish Mortgage.
Klonowski says: “One aspect of investment companies I particularly like is that they can retain part of their annual income to distribute in later years. This has enabled them to maintain a consistent dividend payment even in years when stock market conditions are less favourable, with several having a strong record of increasing their dividends each year.”
“Scottish Mortgage is a prime example of this. Although investing mainly for capital growth, it has a record of paying a consistent and rising dividend so may still suit income-seeking investors. Its five-year performance is way above sector average, but this is no short-term ‘fluke’ - the picture looks even better over 10 years.”
The trust is, however, more known for its high growth style which looks to scoop up ‘disruptive’ companies in their early stages with early stage investments in Alibaba, for example.
Other top holdings include Facebook, Apple and Google.
James Anderson, manager since April 2000, is well regarded for picking some of the highest growth technology companies as well as being a devotee of the rise of China as an economic powerhouse.
Over 10 years the trust has returned 371.55 per cent compared to an IT Global sector average of 143.47 per cent and an index gain of 148.94 per cent.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Piggot likes Scottish Mortgage’s “diverse portfolio with an aggressive edge”, which he believes will outperform over the longer term despite a relatively low yield.
“The yield of just over 1 per cent should cover any platform and custody fees, leaving a little for reinvestment in the dips,” he said.
The trust has an OCF of 0.5 per cent, which Klonowski notes is lower than some tracker funds. It is 13 per cent gearing and is on a premium of 3.1 per cent.
Witan
Gavin Haynes, managing director of Whitechurch Securities, recommends Witan Investment Trust.
He notes that it adopts an innovative multimanager approach, selecting 10 to 12 managers investing across global equity markets.
“Two aspects that I particularly like about the trust are its exemplary dividend growth record and its careful control on annual fees,” he said.
“Although the trust only provides a yield of just over 2 per cent, they have managed to increase it every year for nearly 40 years.”
Despite a global mandate the trust has a high weighting to the UK but typically in names with a high percentage of earnings originating from overseas such as Diageo and Unilever.
Witan has been managed by Andrew Bell since 2010, since which it has returned 75.23 per cent, 25 percentage points more than both the sector average and index.
Performance of fund, sector and index since April 2010
Source: FE Analytics
The trust has an OCF of 0.72 per cent but also has a performance fee, which meant a total charge of 1.15 per cent over the past year.
“This compares very favourably to equivalent multimanager unit trust funds, where overall annual fees can be over 2 per cent,” Haynes said.
It is 11 per cent geared and trades on a discount of 0.2 per cent.
