Here, I’m going to highlight two investment trusts I’d buy for both income and growth. Both of these trusts have delivered strong capital gains over the long term along with rising dividends. 

A top investment trust for income and growth

One investment trust I’d be happy to add to my portfolio for both income and growth is Bankers (LSE: BNKR), which was incorporated all the way back in 1888. Its aim is to achieve capital growth in excess of the FTSE World Index and dividend growth greater than inflation over the long term. Janus Henderson is the trust’s investment manager. 

Bankers Investment Trust has delivered impressive long-term results on both the income and growth fronts. On the income side, it has now delivered 54 consecutive dividend increases. As a result of this track record, it is classified as a ‘Dividend Hero‘. Currently, the yield is a little under 2%.

Meanwhile, on the growth side, performance has been strong. For the five years to 30 June, the trust’s net asset value (NAV) increased 99%. By contrast, its benchmark, the FTSE World Index, returned 88%.

This trust owns some great companies. Names such as Microsoft, Visa, and American Express are currently in the top 10 holdings. One risk to consider here, however, is that the trust is currently quite heavily weighted to two very cyclical sectors – industrials and financials. If economic conditions deteriorate, it could underperform.

Ongoing charges are a reasonable 0.5% per year.

Growth and dividends: a winning combination 

Another trust I’d buy for income and growth is the Alliance Trust (LSE: ATST). It aims to include core equity holding for investors that deliver a real return over the long term through a combination of capital growth and a rising dividend. It invests primarily in global equities across a wide range of industries and sectors. 

This trust has a unique investment process. Its investment manager, Willis Towers Watson, has appointed a number of stock pickers with different styles, who all ignore the benchmark and buy a small number of stocks in which they have a strong belief. The result is that investors enjoy both highly-focused stock picking and increased diversification.

Long-term performance here has been very good. For the five years to 31 July, the trust delivered a total shareholder return of 95%. By contrast, the MSCI ACWI index delivered a total return of 82%.

It also has a good long-term dividend track record. Like Bankers, it is a Dividend Hero. Currently, its yield is about 1.4%.

I really like the portfolio here. Top holdings at the end of July included Alphabet (Google), Microsoft, and Visa. One risk to consider, however, is that it has a bias towards the technology sector. If tech stocks fall, this trust could underperform.

Ongoing charges are around 0.65% per year.

Once you have a broad portfolio and you’re already sitting on long-term profits, handling short-term falls becomes second nature. But if you’ve only built up one or two stocks, a downturn can be very discouraging.

That’s one of the reasons I like investment trusts, as they effectively pool shareholders’ money across a wider range of investments, and that can lead to reduced volatility.

I don’t hold any investment trusts now, but I have done in the past, and I have several on my watchlist. Here are two.

Big discount

One is Caledonia Investments (LSE: CLDN), which I gave a nod to back in October. The trust has a widely diversified portfolio, but its speciality is uncovering and buying up smaller companies with growth potential — and it’s been doing pretty well at it.

It’s global in its outlook too, so I also see Brexit defence characteristics there.

Caledonia shares have done well since I last looked at them. While the FTSE 100 carried on sliding throughout the final quarter of 2018, the investment trust went in the opposite direction.

As a result, over the past 12 months the shares have gained 9% while the FTSE 100 has lost 1% — and the trust is up 53% compared to just 8% for the index over five years. Dividends work the other way, with Caledonia’s 2.2% yield in 2018 about half the FTSE’s — but it’s still a significant overall winner.

Net Asset Value (NAV) per share stood at 3,441p at 31 December, and with a current price of 2,999p the shares are trading at a discount of 13%. I think that’s a bargain.

Better record

My colleague Peter Stephens sees Alliance Trust (LSE: ATST) as an attractive candidate for a starter portfolio, and I agree.

Alliance Trust refocused its investment approach in 2017, and it’s perhaps a little early to tell how that’s likely to work out. But we’re looking at an even better five-year performance than Caledonia Investments, with a rise of 65% — and dividend yields have been similar at around 2%.

Unsurprisingly, shares of a trust with that recent performance are closer to its NAV per share, but they’re still trading at a discount of 5%. That means investors value the company as a whole at 5% less than the assets it owns, and I see another undervaluation here.

Although dividend yields are not great, the trust’s progressive policy should see the actual cash rising ahead of inflation — and over a couple of decades, that can work wonders for your income levels.

Again, Alliance Trust invests globally, and that carries the same relative lack of exposure to Brexit worries in the UK. And I think diversification is important in the early days of your portfolio generally, as it provides a bit of a buffer against local shocks.

I like both

At my stage of investment I don’t really need that single-stock diversification, but I’m looking at these trusts from a different perspective. Although I’m mainly a dividend investor these days, it’s not 100%, and I’m seriously considering the two of them for the more modest growth portion of my portfolio.

That raises the age-old question of whether to go for stocks that are likely to provide capital growth, or those which provide a steady dividend income stream. If you’re still investing and not yet drawing your pension, I really don’t think it makes any difference — your total return is what you get, whichever way.

A growth trust

I’m a big fan of investment trusts for providing retirement wealth, as they’re a way of offering pooled investments where there is no conflict of interest between retail customers and shareholders — because they are one and the same.

Alliance Trust (LSE: ATST) is one I like, especially after a 60% share price rise over the past five years — a period in which the FTSE 100 managed less than 25%. With dividends, the Footsie still handsomely beat a cash ISA, but the Alliance Trust performance is significantly better.

On Monday, it announced the sale of its Alliance Trust Savings (ATS) subsidiary to Interactive Investor for £40m. Its part of the trust’s plans to focus on its global equity portfolio, and, in the words of chairman Lord Smith of Kelvin: “ATS customers, many of whom are Alliance Trust shareholders, will benefit from Interactive Investor’s similar low flat-fee structure, as well as its increased scale and focus.”

Alliance Trust has also been paying progressive dividends, keeping its annual rises ahead of inflation, and that’s something else that I like to see. Although yields are relatively low at around 2%, dividend growth in real-terms can make a significant contribution to your final retirement pot.

Defensive dividends

If you don’t need to spend your dividends right now, you can boost your total retirement capital by reinvesting them in more shares, and I see a tempting dividend prospect in QinetiQ Group (LSE: QQ).

The defence and security specialist has been making some canny acquisitions of late, including the takeover of E.I.S. Aircraft Operations which completed earlier this month. E.I.S. provides airborne training services, and it looks like a good fit for the company to me.

The latest buy, announced Monday, is the acquisition of an 85% stake in Inzpire Group Limited, with an agreement for the remaining 15% after two years.

Inzpire also appears to fit in nicely with QinetiQ’s portfolio of services, with QinetiQ describing the company as “a leading provider of operational training and mission systems for military customers in the UK and internationally.”

Solid returns

The defence business has been in a bit of a squeeze in recent years, but it’s coming out of it, and QinetiQ has been managing to keep its dividend growing well ahead of inflation. In the four years from March 2014 to 2018, the dividend has been lifted by 37%, from 4.6p per share to 6.3p — and forecasts suggest a further 9% over the next two years.

And over the past five years, the share price has put on 38% (even if a bit erratically), providing a tasty overall return — especially for those future pensioners who bought new shares with their dividend cash.

However, a number of investment trusts continue to trade at a discount to their net asset values. This could indicate that they offer good value for money. And since they offer a high level of diversification, they could prove to be worthwhile buys for the long run. Here are two trusts that could be worth a closer look.

Impressive performance

Reporting on Thursday was internationally-focused business Alliance Trust (LSE: ATST). The company experienced a year of significant change during 2017. Notably, it changed investment manager and implemented a new investment approach. This provides those putting their cash into the company with exposure to a number of global equity managers who are investing in high-conviction ideas.

The trust delivered a total shareholder return of 19.2% during 2017. This compares to the MSCI ACWI total return of 13.8% during the same time period. This is a positive result at a time when global stock markets experienced a bull market. Since the company has exposure to a variety of shares in a number of different regions internationally, it could be set to benefit from further improvements in the outlook for the global economy.

With Alliance Trust trading at a discount of around 6% to its net asset value, it appears to offer good value for money. Since it has a significant amount of diversification and a good track record of growth, it could be a sound purchase for a starter portfolio.

Growth potential

Also offering long-term growth potential is the Mercantile Investment Trust (LSE: MRC). The company is invested solely in UK equities, with its major holdings having a bias towards mid-caps. Historically, mid-caps have outperformed larger companies and are often seen as more volatile and risky, but with higher return potential.

Certainly, investing in FTSE 250 stocks prior to Brexit could be seen as a risky move. In many cases, they are focused on the UK economy and so a further decline in the forecast GDP growth rate could lead to difficult trading conditions for them.

However, with the Mercantile Investment Trust having delivered total returns of 92% in the last five years versus a return of 51% for the UK all companies sector, it has a solid track record of outperformance. Furthermore, since it trades at a discount to net asset value of 9%, it appears to offer good value for money.

While the prospects for UK equities could be uncertain, the reality is that their risk/reward ratios could be enticing due to investors having priced-in potential risks. As such, the trust could be a worthwhile purchase for a starter portfolio.

Investment trusts provide the perfect solution to this dilemma, in that a trust’s investors and shareholders are one and the same. Initial capital is provided at IPO time, and the only way to invest is to buy shares.

Global equity

I’ve been examining Pantheon International (LSE: PIN), which released first-half figures today. Pantheon is a little unusual in that it invests in private equity funds with a global reach, which makes it something of a fund-of-funds vehicle.

I’d usually shun such beasts with their dual layers of management costs, but I quite like Pantheon for several reasons. As an investment trust it avoids that top-level conflict of interest, and it gives small investors access to private equity, from which they would otherwise be excluded. But the thing I most like is its impressive performance. 

The period saw a net outflow of cash (including distributions) of £137m from the company’s portfolio, and net assets fell to £1,217m from £1,388m. But there were £196m in new investment commitments made in the six months, and on a per-share basis I think things look good.

Net asset value (NAV) per share, a key measure for investment trusts, rose by 2.5% from 2,189p to 2,245p. The share price did grow ahead of that over the same period, by 4.2% from 1,793p to 1,869p, and that narrowed the discount — but it still stood at 16.8%, which looks attractive to me.

The share price has doubled in five years, to 1,860p at the time of writing, while the FTSE All-Share index has gained just 20%, so we’re looking at an outperformer here.

50-year champion

Alliance Trust (LSE: ATST) also has a global outlook, but with a more conventional approach of investing in large international companies rather than private equity. And it’s been a byword for long-term performance for decades.

Alliance Trust has lifted its annual dividend for 50 consecutive years, a record that few can match. Yields have been relatively low at around 2%, but investors have enjoyed solid share price growth too. This time we’re looking at 71% over five years, which again trounces the FTSE All-Share, and an outperformance that stretches back further.

At the halfway stage at 30 June 2017, NAV per share stood at 742.2p with the shares at 700p, representing a 5.7% discount. That’s narrow by investment trust standards and suggests that investors see little risk in Alliance Trust, compared to the smaller and riskier Pantheon with its discount close to 17%, though it has also been affected by Alliance’s share buyback programme.

Attractive returns

First-half total shareholder returns came in at 10.8%, with the firm’s equity portfolio beating its benchmark by 4.2%. That comes at a time of transition to a new investment approach, which essentially consists of adopting a multi-manager approach.

That can result in higher charges, but the transition was apparently at a much lower cost than originally anticipated, and the company is targeting charges of no more than 0.65%.

How well this new approach continues to beat the indices remains to be seen, but right now I’m seeing another long-term buy.

Global equities

The Brunner Investment Trust (LSE: BUT) is one such fund. With shares trading at a discount of 12% against its net asset value per share of 844p, prospective investors have the opportunity to pick this global equities trust for less than the sum of its parts.

This doesn’t seem like a big discount in comparison to some other trusts, but it does look unwarranted given that the fund owns a highly liquid portfolio of global equities and has a relatively low ongoing charges ratio of 0.73%.

Capital and dividend growth

The fund aims to provide its investors with both capital growth and growing dividends by investing in companies all over the world, seeking out opportunities for growth and reliable dividends wherever they may be. It has 45 years of consecutive years of dividend increases under its belt, giving it one of the strongest track records of dividend growth in the investment companies sector.

With a portfolio of 74 stocks, Brunner has a well-balanced portfolio, with no sector accounting for more than a quarter of its total asset value. Big positions include Royal Dutch Shell (3.1%), Microsoft (3%), Abbvie Inc (3%), UnitedHealth (2.9%), and BP (2.2%).

Multi-manager strategy

Alliance Trust (LSE: ATST) has an even longer track record of boosting shareholder payouts, with 50 years of consecutive dividend growth. That’s an impressive feat, but what really sets it apart from its peers is its unusual investment strategy.

After years of lagging investment returns, the company has shaken up in its strategy by adopting a new multi-manager model. Although there are a few other investment companies which also utilise a multi-manager approach, they tend to suffer from closet tracking and high costs.

Alliance Trust intends to overcome flaws in the traditional multi-manager model, by targeting ongoing charges ratio at below 0.65% — less than half the typical ongoing charges figure for a multi-manager fund. It also intends to avoid over-diversification, which brings closet tracking, by hiring external managers to select only high-conviction picks with specific investment objectives, reducing its likelihood of generating index-hugging performances.

Investment performance

It’s too early to see whether this change in its investment strategy would deliver outperformance for shareholders over the long term. So far though, the results are encouraging. The fund reported a net asset value total return of 11.8% since the change in strategy in April 2017. This compares favourably against the 8.2% return from its MSCI All Country World Index benchmark over the same period.

Alliance Trust currently trades at 6% discount against its NAV, with shares in the fund yielding 1.7%.

Put simply, investment trusts are long-term-focused diversified instruments, which makes them the perfect asset for both beginners and experienced investors alike.

One example is the Diverse Income Trust (LSE: DIVI) from fund manager Miton. Diverse Income’s goal is to achieve a steady level of income for its investors as well as booking capital growth over the long term. Even though it’s only a few years old (inception 2011), the company has so far managed to beat its benchmark substantially, returning a cumulative 160% since launch, compared to its UK Equity Income Sector Benchmark return of 98.9% over the same period.

Income portfolio

Diverse Income has been able to achieve this return by investing in a broad selection of UK mid-caps that have both bright growth prospects and sustainable dividends. Currently, the top holdings include logistics company Stobart Group, insurance business Charles Taylor, IG Design Group and Zotefoams.

At the time of writing the trust supports a dividend yield of 3.3% and trades at a slight discount to its net asset value of 0.6% (last recorded net asset value is 103.9p). The one downside of this investment is the trust’s slightly higher than average ongoing management charge of 1.15%, although I believe that this is a fair charge considering the outperformance it has generated over the past five years.

Growth investor 

Another investment trust that might be a great addition to a beginner investors’ portfolio is the Artemis Alpha Trust (LSE: ATS).

I believe this one is an excellent buy as it offers exposure to growth stocks as well as international equities and unquoted businesses. According to the trust’s most recent half-year report, at the end of October, 25% of the portfolio was invested in unquoted companies while only 87% of the public quoted equity portfolio was invested in the UK.

Is that a good thing? Unfortunately, Artemis Alpha’s high-risk approach hasn’t paid off over the past five years. During this period the fund has underperformed its benchmark by around 50% excluding dividends. Thanks to this lacklustre performance, the shares currently trade at a discount to net asset value of 19.6%. On a net asset value basis, the trust has only underperformed by 35% excluding dividends.

Nevertheless, despite this poor short-term performance, I believe that over the long run, Artemis Alpha’s international diversification coupled with its focus on high growth businesses will produce returns for investors. Total annual fees are only 0.9%, and in addition, the trust supports a dividend yield of 1.4%. 

For beginner investors who want exposure to high-growth small-caps, but don’t know where to start, Artemis Alpha could be a great buy.

RIT Capital Partners (LSE: RCP) is one of the most successful investment trusts there is. Chaired by Lord Rothschild, since 1988 the company has produced an annual return of 12.9% for investors, turning £1,000 into £30,000. 

Since 1990, it has returned 470%, eclipsing the FTSE 100’s return of 19.5% over the same period excluding dividends. 

Finding value of the market 

Today RIT reported its results for the first half of the year, which showed yet another strong investment performance. Net asset value per share increased to 1,784p with a total return of 4%, from 1,730p, while pre-tax profit rose to £111.1m from £89.6m.

One of the greatest benefits of investing in RIT is that the firm is able to put its money into unquoted companies, offering a level of diversification not available to most private investors. Indeed, today the company reported that its net quoted equity exposure averaged 43% during the first half and management has been looking for more private market opportunities to reduce exposure to expensive public markets. To that end, RIT has invested in US-based Social Capital LP, which it called one of “Silicon Valley’s leading technology investment firms“. 

Overall, the investment trust is directing its exposure to “investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers,” according to Lord Rothschild. 

Not cheap 

Unfortuntately, because RIT has generated such impressive returns for investors during the past decade, shares in the trust are not cheap. At the time of writing the shares are changing hands at 1,941p, a premium of 8.8% to net asset value. After increasing its interim dividend payout by 3.2% today, RIT is on track to pay out 32p per share to investors for the full-year, giving a dividend yield of 1.6%. 

Still, even though it is trading at a premium to net asset value, if the firm can continue to produce double-digit returns for investors every year, this is one company that you can rely on to increase your wealth. 

Undervalued 

Alliance Trust (LSE: ATST) might be a better choice than RIT if you’re looking for a trust that’s trading at a discount. It has struggled over the past few years, which has resulted in investors avoiding the firm, but a recent shake-up has put an end to the poor investment performance. 

Alliance Trust reported a net asset value total return of 12.4% over the six months to June 30. This compares with a 6.4% return from the MSCI All Country World Index over the same period. The better performance, coupled with the trust’s restructuring has sent its shares higher by 22% excluding dividends over the past year, and there could be further gains ahead. 

Based on the most recent figures, Alliance’s net asset value per share is just under 749p, 4.6% above the current price of 417p. Management has instigated a stock buyback to try and reduce this discount. The shares support a dividend yield of around 1.8%. 

The real beauty of dividend income is that most companies aim to increase their payouts over time, compounding the benefits and helping you outstrip inflation. The following three investment trusts have been doing just that for an incredible 50 consecutive years. Here’s to the next half century…

City of London Investment Trust 

The City of London Investment Trust (LSE: CTY) offers investors long-term income and capital growth primarily by investing in companies listed on the London Stock Exchange. It has done both of these things, returning 75% over the last five years and currently yielding 3.88%, according to figures from Trustnet.com. By comparison, the FTSE 100 has grown 29% over that period, and currently yields 3.69%.

This isn’t a shoot-the-lights-out fund, it is second quartile over one and three years, and has only just beaten its benchmark UK equity income sector. But its record of long-term dividend growth is impressive, and manager Job Curtis pins this on a combination of investing in good companies and its investment trust structure, because it can raid reserves in the good years to fund payouts in tougher times. Curtis has done this in seven of the last 25 years. He says the UK dividend outlook is promising, boosted by sterling’s fall over the last nine months.

Bankers Investment Trust

The Bankers Investment Trust (LSE: BNKR) has also delivered a half ton of consecutive annual dividend increases. It invests in a diversified international portfolio with the aim of delivering capital growth in excess of the FTSE All-Share Index, and dividend growth exceeding the retail prices index. Manager Alex Crooke says its growth record actually stretches all the way back to the Second World War with a blip after capital gains tax was introduced in 1966, which prompted companies to make a bumper payout in 1965.

Crooke says the global dividend outlook is mixed because many US and European companies now pay a relatively high percentage of their earnings as dividends. But he still anticipates growth in the range of 3% to 5%, or more if the pound continues to fall against overseas currencies. Over five years, the fund has grown 105%, against 83% on its benchmark global index. The yield is relatively low at 2.25%, but that is hardly surprising given that the trust has leapt an impressive 37% in the last year.

Alliance Trust

The £2.75bn investment trust giant Alliance Trust (LSE: ATST) has a history going back all the way to 1888 and the last 50 years been a dream for dividend seekers, with growth every step of the way. Its current yield of 1.82% may look low, but again, that is partly a consequence of stellar recent growth, with the trust up an incredible 46% over the past 12 months. Over five years, it has returned 110%.

It has done this by investing in a global spread of stocks, including big names such as Walt Disney, Pfizer, Visa, Amgen, Blackstone and Microsoft. It is also first quartile over one and three years. Whether you want growth today or income tomorrow, you could do worse than putting your trust in these three dividend heroes.

Cracking returns

HICL Infrastructure (LSE: HICL) this morning reported an annualised total shareholder return for the six months to 30 September of 10.4%, based on dividends paid and an increase in the firm’s net asset value (NAV).

HICL is an investment firm that puts its shareholders cash into public infrastructure, and so NAV is a good valuation measure — with the cavaat that asset values are sometimes subjective and can be volatile.

NAV per share came in at 145.7p, for a rise of 2.5% from March’s figure of 142.2p, and dividends in the period of 3.82p per share support the company’s full-year target of 7.65p — which would provide a yield of 4.6% on today’s share price.

A return of 10.4% is very impressive, and if it could be repeated year after year, it would be enough to double your original investment in just seven years — but be aware that it’s a stretching target.

HICL told us its investment portfolio value was up 7.9% in the six months, to £2,189.9m, and there appears to be a strong pipeline of investments in the planning stages. Total income rose by 19.2%, with pre-tax profit up 19.1%, and dividends declared so far have been lifted by 2.7%.

The share price didn’t move a lot today, and at 168p it’s ahead of the firm’s NAV per share — but not by much, and the excess seems to me to represent a fair premium for HICL’s investment expertise.

In all, I see strong overall returns over the next few years, and coupled with a progressive dividend policy I like what I see here.

Trust in trusts

I’ve always been a fan of investment trusts, which provide pooled investment vehicles whose profits belong solely to shareholders — so there’s no clash of interest between company owners and customers.

I’ve been looking at Alliance Trust (LSE: ATST), whose shares are up 50% over the past five year, at 584p. The venerable investment trust puts its shareholders’ cash mostly into large global companies and aims at long-term growth. And it’s doing well at it.

By the halfway stage at 30 June, Alliance’s NAV per share had reached 591.4p — up from 561.1p in December 2015, and 545.9p the previous June.

Investment returns over the summer have been erratic due to EU referendum upheaval, and Alliance predicted “at least a mild recession as investment and consumption freeze up in the midst of so much uncertainty“, but the firm stressed its reliance on “a defensive portfolio that is invested in companies that are growing through structural change“, which should be less vulnerable to cyclical change and short-term political machinations.

With the shares price at 584p today, we’re looking at a discount to NAV of less than 1.5%, which has narrowed considerable since the interim stage. In a sector in which discounts are common, that suggests sentiment has been improving in recent months, and Alliance Trust has probably attracted some of the cash fleeing the Brexit panic.

Dividend yields are low at around 2%, but with Alliance chasing growth that’s fine — and the shares look attractive to me.