Investment trusts are the unsung heroes of the investment world. They have been quietly going about their business for decades and in some cases more than a century.
Happy 130th birthday!
The Merchants Trust (LSE: MRCH) celebrates its 130th birthday this year, having been launched in 1889, the year the Eiffel Tower was opened and Van Gogh painted his Starry Night. It may not be as famous, but it has also stood the test of time.
The £507m trust aims to deliver market-beating income and long-term capital growth from a portfolio of higher yielding large UK companies. It is targeted at investors who want a spread of mainstream UK stocks, judging by its top 10 holdings.
Pick and choose
These are all FTSE 100 dividend income stalwarts such as Royal Dutch Shell, GlaxoSmithKline, HSBC Holdings, Imperial Brands, BP, SSE… need I go on? Many of you will prefer to buy stocks like these directly yourself, but if you want to hand over the reins, this could be for you.
As portfolio manager Simon Gergel points out, this trust has 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,” he adds.
Historic performance
UK equities have underperformed global stock markets lately but the trust has risen 38.8% in the last three years, according to Trustnet.com, against 28.4% on its benchmark UK equity income index. However, it trails over five years, growing 22% against 26.9% for its benchmark.
Like many investment trusts, management charges are low, with a total ongoing charges figure (OCF) of just 0.59%. I usually prefer trusts trading at a slightly larger discount than Merchants, currently just -0.2%, but this is one in demand. It also has an impressive yield of 5.5%. Not many funds offer that.
So should you buy this instead of, say, a tracker such as HSBC FTSE All Share Index, which has a rock bottom OCF of just 0.06%? This fund’s three-year performance is slightly weaker at 36.9%, but it has beaten Merchants over five years growing 31.5%. The yield is currently lower, though, at 3.99%. Income seekers may decide Merchants just has the edge. These two investment trusts might also tempt you.
Think small
BMO Global Smaller Companies (LSE: BGSC) is also celebrating its 130th birthday and has grown strongly after the board switched focus to smaller companies in 1975. It is now worth more than £800m.
Now, I personally believe that trackers are the best way to tap into well-researched large-caps while active management is better suited to riskier and less researched smaller firms. So how does BMO do? Pretty well, frankly. It is up 48.8% over three years and 64.3% over five, and although it trails its benchmark IT Global index, this may reflect the strong performance of huge US technology stocks that this fund does not touch.
Size isn’t everything
This trust gives you access to smaller global stocks you would never unearth yourself, plus exposure to specialist funds such as Aberdeen Japanese Smaller Companies, spreading risk. It has global exposure but with plenty of US focus (39%) and UK (25%). Check if this balances your portfolio. Charges on smaller-cap funds are usually slightly higher but an OCF of 0.83% is respectable, as is performance.