I think investment trusts are great. They give me diversification, and they come with a wide variety of strategies to suit just about everyone. I also get to own my share of the company managing the investments, so there’s no conflict of interest between owners and shareholders.
Here, I’m looking at three investment trusts I think could make great buys for investors who have a long-term horizon.
Merchants Trust
Merchants Trust (LSE: MRCH) is one of the many investment trusts targeting UK equity income. It’s on a forecast dividend yield of 5%, having lifted its annual payment every year for the past 40 years.
The trust pays its dividends quarterly. So it might be a good one for investors who are drawing down an income to contribute towards their living costs. I’m still a net buyer of shares, but it’s a factor I will consider in the future.
Can Merchants Trust keep its dividend growing for the next 40 years? It holds some top long-term cash cows, including British American Tobacco, Imperial Brands and BAE Systems. So I’m optimistic.
There is risk though. What if tobacco finally goes out of fashion in the coming years? It also holds GSK, formerly known as GlaxoSmithKline, whose dividend is only weakly covered. And GSK earnings have dipped in the past couple of years.
Lindsell Train
Lindsell Train Investment Trust (LSE: LTI) is partly managed by Nick Train, who has built a positive reputation among private investors.
The structure might seem slightly strange, in that a little over 40% of its funds are in Lindsell Train Limited. That’s the company that runs the trust, plus other investments in a number of global companies.
But it does give investors a way to own a portion of the parent company’s other investments without it having to be an investment trust itself.
A few years back, the trust’s shares soared to a premium of 90% over asset value. And investors paying nearly twice as much as the underlying assets were worth was rather bizarre at best. That bubble burst, and the shares are now on a very small discount of 0.25%.
What’s the main risk? I think it’s the unusual holding structure, which could present volatility through uncertainty.
Scottish Mortgage
I have to include Scottish Mortgage Investment Trust (LSE: SMT), which has fallen 42% over the past 12 months. The drop is down to a bear market in US technology stocks, which the trust invests in heavily.
Its top 10 investments include Moderna, Illumina, ASML, and others whose share prices have slumped. The Nasdaq itself, which is actually home to a wider rage of companies, is is down 25% in 12 months.
I think US tech stocks had been getting a bit overheated, and I welcome the correction. The danger is that the run on tech shares might not be over. If it continues, the Scottish Mortgage share price could surely fall further.
Still, the trust is trading on a 15% discount to net asset value now. So there’s a bit of a safety buffer there.