With most of the UK’s investment trusts, buying now looks like a contrarian move. And that’s because their share prices have moved lower.
However, lots of investors target the stocks of individual companies after they’ve plunged. And the same strategy could be successful with investment trusts over the long haul.
Hunting keener valuations
The idea is to aim at buying stocks when they assign a lower valuation to an underlying business. And it often takes uncertain economic times to drive share prices lower.
However, the strategy is not without risk. Sometimes lower share prices are justified by changes in a business. Indeed, deteriorating general economic conditions, such as recessions, can damage an enterprise. And in some cases, a business may find it hard to recover — even when conditions improve.
One way of aiming to mitigate such individual company risks is by buying shares in investment trusts. As a quick reminder, an investment trust is a company listed on the stock market that buys shares of other companies. It can also invest in other assets, such as property and debt. And the trust’s investment manager and its team choose the investments and decide when to buy and sell.
When buying shares in an investment trust, we are really buying a slice of the underlying portfolio of investments. And we are also placing a bet on the skills of the management team. However, positive performance is not certain.
But the setup of investment trusts does mean those managers are free to aim to pick the best potential investments available. And there is potential for that to be a long-term advantage over investing in passive stock market tracker funds. But one of the key benefits is that investment trusts tend to diversify between several underlying investments.
Higher volatility possible
That said, the investment trusts in my own share account have fallen further than my tracker fund investments. But much of the reason for that, I feel, is the investment trusts were growing faster than the tracker funds in the good times. And that suggests to me that investment trusts in general could be more volatile than trackers. I think that could be particularly true of those that perform the best in the bull markets.
But is now a good time to buy investment trusts? For me, it is. But I’m doing so by investing regular amounts of money each month. And alongside that approach, I’m also adding monthly sums to several index tracker funds. But if I didn’t already own shares in several investment trusts, I’d be giving them serious consideration now.
For example, I’m holding Fundsmith Emerging Equities Trust, Smithson Investment Trust and Finsbury Growth & Income Trust, among others. But there are many to research such as Scottish Mortgage Investment Trust, Allianz Technology Trust and Blackrock Throgmorton Trust, to name but a few.
I’d research the holdings of each trust that interests me and make sure I’m happy with the manager’s approach to investing. And I’d also consider the performance record and familiarise myself with each trust’s aims for the future.