Investment Trusts from the Past for the Future

Five investment trusts are celebrating their 125th birthday this year. Morningstar analyst Jackie Beard explains why they have lasted so long and what the future holds

Jackie Beard, FCSI 25 February, 2014 | 12:01AM
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This year, five investment trusts are celebrating their 125th birthday: British Empire (BTEM), F&C Global Smaller Companies (FCS), Merchants (MRCH), Edinburgh Investment Trust (EDIN) and Law Debenture (LWDB). A handful of their peers are even older – Foreign & Colonial Investment Trust (FRCL) was already 21 years old when these quas-quas-quicentennial celebrators were born.

So why is it that these investment trusts have enjoyed such longevity and age so much better than some of their peers? One answer lies in their ability to adapt to the current investing environment.

Foreign & Colonial Investment Trust, which launched in 1868, had a very different look when it started out, with investments comprised primarily of government bonds.  But as investment opportunities changed and stock markets evolved, so did the fund, and in 1925, the fund started to invest in equities.  In marked contrast to its holdings at launch, today that fund has less than 1% invested in bonds.

This change in strategy can be driven by the asset management firm that’s been appointed as the investment manager, or by a proactive and engaged independent board. The difference between the two approaches within the different fund structures is stark, but they both demonstrate funds that recognise market change and evolve to adjust.

Take a recent example in North American Income Trust (NAIT), until 2012 known as Edinburgh US Tracker.  While relatively cheap for an investment trust, the fund was an expensive tracker fund that generally underperformed its benchmark. Given the proliferation of exchange-traded products that can track an index more efficiently and more cheaply, in a time where technology has driven costs down and efficiency up, that tracker simply didn’t cut the mustard any more. The board, and Aberdeen Asset Management, approached shareholders with their proposals, namely, to have the fund managed in an active way and to introduce a bias to income. That means they can make full use of the revenue reserve account and the benefits it brings, and create a product that’s relevant for today’s investors.

Contrast that with a fund that will be moving into the Aberdeen stable through corporate activity—Scottish Widows UK Tracker—whose performance has been erratic when compared with the FTSE 100 index, sometimes outperforming it in a year, sometimes underperforming it, yet that fund comprises some £211m of investors’ assets. Inertia means that fund still exists. So rather than a fund fall out of vogue, or be a serial underperformer that relies on sticky assets, an investment trust can give itself a face lift, or even a whole new appearance.

That’s not to say that we think funds should keep reinvesting themselves. Take Merchants Trust, which celebrated its 125th birthday in February. At launch, the fund’s aim was to give shareholders a diversified portfolio of equities and that aim is still intact today. For sure, manager Simon Gergel may do this in a different way from his predecessors, but the nature of the fund and its focus on income growth as well as capital growth through a portfolio of equity investments is largely unchanged.

Nonetheless, the fact is there are 17 funds that were born in the 1800s and are still alive and kicking today. That’s a small number, but it shows they must be doing something right. More importantly, those funds have mandates which are relevant for today’s—and tomorrow’s—investors. They aren’t highly trendy, or very niche; they are all funds which offer core exposure for an investor’s portfolio, at a decent cost for active management.

This article originally appeared in an Incisive Media publication

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AVI Global Trust Ord243.00 GBX0.83Rating
Edinburgh Investment Ord752.00 GBX0.80Rating
F&C Investment Trust Ord1,034.00 GBX-0.77Rating
Law Debenture Corporation Ord898.00 GBX0.45Rating
Merchants Trust Ord591.00 GBX1.20Rating
North American Income Trust Ord306.00 GBX0.99Rating
Scottish Widows UK All Share Track I Acc381.22 GBP0.69Rating
The Global Smaller Companies Trust Ord165.60 GBX0.24Rating

About Author

Jackie Beard, FCSI

Jackie Beard, FCSI  is Director of Manager Research Services, Morningstar EMEA

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