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Investor Views: Why I Prefer Investment Trusts

Private investor John Knight tells Morningstar about his diverse range of investment trust holdings - and how one closed-end fund has served him well for 30 years

Emma Simon 27 April, 2016 | 10:26AM

At 70, John Knight is now retired, but this does not mean he is no longer looking for capital growth from his investments. To do this, Knight holds a range of investment trusts, some of which he invest in through a tax-efficient ISA wrapper.

I like the fact investment trusts have independent boards and the ability to gear

As well as couple of large generalist trusts, such as Witan (WTAN), he also holds far more specialist vehicles such as Venture Capital Trusts and private equity investment trusts.

He says: “These can be highly tax efficient, and hopefully produce good growth too. I am not particularly looking for income at this stage, capital preservation is more important, but I want to make sure my money is growing, not standing still.”

Knight has been invested in VCTs for a more than a decade. His holdings include two of the more established VCTs: Baronsmead (BVT) and Northern Investors Company (NRI) as well as some relative newcomers, such as Octopus Aim VCT (OOA).

Knight says: “The newer VCT vehicles tend to have more of a tech focus. Changes to the VCTs rules will mean these trusts have to focus more on start-up and newer enterprises, which will include many of those operating in these hi-tech industries. This may mean that some of the longer established players will have to change the way they do things.”

He says he is keeping a ‘watching brief’ on how existing holdings, like Baronsmead, perform under this new regime. “I won’t be taking my money out at present, as I don’t want to lose the tax rebate, but I won’t be adding to this holding either. I will monitor how it does in the next couple of years.”

Trusts Offer Access to Less Liquid Investments

Elsewhere, Knight says he has also recently invested in private equity investment trusts. As he points out investment trusts are a good way to get access to this growing sector. He says he hopes this sector is well placed to deliver capital growth.

Holdings in this area include Electra Private Equity (ELTA) and Pantheon International (PIN). Electra Private Equity currently trades at a 10% discount, but its share price has risen by 18% over the past three years, the net asset value of the trust is up 14% over the same period.

Pantheon has a five-star rating from Morningstar, reflecting its relatively strong performance recently. The investments are managed by Andrew Lebus, with the objective of “maximising capital growth by investing in a diversified portfolio of private equity funds and occasionally directly in private companies”. It currently trades on a 26% premium, and its share price is up 7.5% over the past three years, with NAV up by more than 10%.

Thirty Years of Investment Trust Success

Knight says he started investing in investment trusts back in the 1980s, when he worked in the City as an analyst, then as a fund manager himself. He is now retired, and has moved from London to Hemel Hempstead, where he lives with his wife.

“Initially investment trusts were great way to get global exposure. Trusts like Witan were a good one-stop-shop,” he said.

Knight held a number of global generalists, but over the years he’s gradually reduced his holdings in this particular sector.

“In today’s market it’s quite hard to be a global fund manager. I tend to decide today how much of my money I want in different regions: be it Europe, the US, Asia, or other emerging markets - then try to pick managers that specialise in these areas. These may be investment trusts or unit trusts.”

However he has continued to hold Witan, which has proved to be a solid long-term performer. The trust has a five-star rating from Morningstar, and the managers Andrew Bell and James Hart have a coveted Silver Rating.

David Holder, senior fund analyst at Morningstar says: “Witan Investment Trust is a solid choice for investors seeking core global equity exposure. The process of transition from largely passive to active management has been successfully implemented, and the resultant strategy is now established and executed to good effect for investors.

“Shareholders benefit from low costs, though the fees did tick up initially owing to the move away from passive funds to active. Nonetheless, the fund is competitively priced, particularly when compared with open-ended global equity funds of funds.”

Smaller Companies Provide Growth

Elsewhere, Knight says smaller company investment trusts have performed well for him lately. “I increased my holding to this sector two to three years ago, when discounts were wide. They then narrowed, although more recently have started to move back out again.”

Among his holdings are Henderson Smaller Companies (HSL), BlackRock Smaller Companies (BRSC) and BlackRock Throgmorton (THRG).

All three trusts are rated highly by Morningstar. The BlackRock Smaller Companies has a four star performance rating and the manager, Mike Prentis has a much valued Gold Rating. Over the past three years this trust’s share price has risen by more than 14%. It is currently trading on a 12% discount. The Throgmorton trust, on which Prentis is a co-manager, has a Silver Rating.

Henderson Smaller Companies Trust has a three star performance rating from Morningstar and its manager Neil Hermon has a Bronze Rating.

Knight says he does invest in unit trusts alongside his investment trust portfolio but he likes the fact investment trusts have independent boards and the ability to gear, although he says some use this “too aggressively”.

“The discounts on investment trusts can work in investors’ favour,” he said. “Some financial people will point out that investment trusts have outperformed unit trusts, but I am not sure how much of this is down to a concerted effort by the industry in recent years to narrow discounts. This obviously gives a tick up to the share price. But this is a finite exercise, I’m not sure we’ll see the same benefits going forward.”

He says he always steers clear of trusts that are too highly geared, meaning the manager has borrowed money to add to a particular conviction, which helped him avoid the split capital trust debacle in recent years.

He adds: “I have bought zero coupon shares more recently, when they are available. A few trusts still offer them without the inflated gearing. These can be a good way to deliver income, even though it is charged against capital gains tax.”

What funds are in your ISA or SIPP? What have been your most successful investments to date? If you'd like to feature in Investment Views and tell us about your investment strategy please contact the Editorial team on UKEditorial@morningstar.com

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Baronsmead Venture Trust Ord71.50 GBX-1.38
BlackRock Smaller Companies Ord1,432.00 GBX1.42
BlackRock Throgmorton Trust plc574.00 GBX0.00
Electra Private Equity Ord335.00 GBX-2.05
Henderson Smaller Companies Ord840.50 GBX0.78
Octopus AIM VCT Ord93.50 GBX0.00
Pantheon International Ord PLC2,290.00 GBX0.22
Witan Ord219.00 GBX0.46

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk

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