Three Trusts to Boost Your UK Exposure

These investment trusts have seen strong long-term gains by investing in UK stocks

Sunniva Kolostyak 20 May, 2022 | 10:12AM
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UK thinking

We’ve had a full special report week of focusing on what it means to invest in the UK.

Given British investors' love of investment trusts, it only seems right to focus on three good trusts with a UK focus. 

We selected the three trusts below because of their high rating, and because they all focus on slightly different areas of the UK market. There's one large-cap vehicle, one that targets small-cap, and one with a more flexible focus.

Without further ado, these are three of our highest-rated UK trusts.

City of London

The City of London Investment Trust is situated within the large-cap category and focuses on investing in a core selection of UK equity-income stocks. It is favoured among Morningstar’s analysts because of the combination of an exceptionally experienced and long-tenured manager, consistent process, low fees, and a focus on dividend generation. Moreover, it is very competitive within its peer group.

Job Curtis has led the trust since July 1991, a tenure length that's exceptionally rare. Meanwhile, the portfolio has remained consistent and "conservative" too. The bulk of analysis is done from the bottom up, with a primary focus on dividend yield – which has allowed the trust to consistently increase its dividend year on year, even during the pandemic, when several companies saw cuts.

The trust’s portfolio currently includes 83 stocks, and its three biggest are British American Tobacco (BATS), Diageo (DGE) and Shell (SHEL). It is the only one of our three picks that has had a positive 2022 so far, with 6.04%. On an annualised basis, it has grown 3.64% over the past 5 years and 8.59% over the past 10.

abrdn UK Smaller Companies Growth

Abrdn’s smaller companies trust is a Gold-rated strategy with a strong management, focusing on momentum, growth, and quality factors. Morningstar’s analysts have a strong belief in long-standing manager Harry Nimmo (manager of the trust since 2003 and its open-ended counterpart since 1997) and comanager Abby Glennie, who also leads the UK mid-cap strategy.

The team uses a common investment process and quantitative screening/scoring tool, while valuation acts as more of a sense-check. Companies must have sustainable longer-term growth prospects, proven business models, and recurring earnings. This style bias can at times cause performance to look out of step with peers and relevant index comparators. But the team doesn’t deviate from the investment style, ensuring strong long-term returns.

The trust only holds 54 stocks and its top three (Safestore Holdings, Hilton Food Group and Kainos Group) are all private companies. The strategy has taken a solid beating this year – the fund is down 35.08% at writing. But, its longer-term returns are significantly more optimistic. Over the past five years, the trust has an annualised return of 4.49, and its 10-year growth is 11.25% year-on-year.

Fidelity Special Values

Another Gold-rated trust with a UK focus is Fidelity Special Values. The fund was recently upgraded from Silver because of a rigorous investment process and a manager who continues to impress with his approach to portfolio construction.

Alex Wright has managed this strategy since September 2012 but has worked for Fidelity since 2001. He is a thoughtful investor who practices a contrarian, value-orientated approach. The team targets unloved companies that have the potential to recover based on factors such as a unique business model, corporate change, or offering exceptional value. The aim is to buy into such situations at an early stage, ideally before any recognition of a change in fortunes, either in terms of sentiment or operational results.

This is truly an all-cap strategy, with an even greater weighting to small-cap stocks than on the open-end Fidelity Special Situations, which Wright has managed since 2014 using the same approach. The top three of its 144 investments is CFD on Aviva, Serco Group and CFD on Sanofi. 2022 has been a tough year, and the trust is down 14.01% - but the trust’s NAV is only down 4.37%. Annualised over five years, the return has been 3.48% but over 10 years, the return has been 12.69%.

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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About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk