In search of a stable investment to put into your Isa or self-invested personal pension (Sipp) that should help build up reserves for your golden years? You might want to consider a generalist investment trust.
In a break from the past, these trusts are on a mission to woo private investors by changing the way their portfolios are structured to improve returns.
A decade ago, most of these trusts were staid, but stable long-term investment vehicles that invested in a wide range of companies as well as UK government bonds (gilts) to achieve steady but respectable returns. They particularly catered to insurance companies and pension plans looking to gain exposure to equity and fixed-income
“In most cases, they were bags of equities or Oeics with wings,” says Alan Harden, chief executive of Alliance Trust, one of the oldest and biggest generalist trusts, referring to open-ended investment companies, funds where the unit price directly mirrors the value of the underlying assets.
However, institutional investors now tend to overlook these trusts – once the most popular collective investment vehicle – as they want more control over the allocation of assets.
“By and large, as a species, generalist investment trusts have had a bit of a struggle. The market has evolved over the last 25 years and demand for these products from institutional investors has shrunk,” says Jonathan Ruck Keen, managing director at Merrill Lynch. “There are still lots of good ones out there, but generalist investment trusts don’t hold the same kind of appeal as they used to.”
To shore up their base of investors, generalist trusts are therefore undergoing makeovers to boost their performance and widen their appeal.
In many cases, boards now give managers more freedom to invest in different asset classes or have taken other steps to ensure the management of these funds becomes more active. The management of a growing number of funds is also being taken over by boutiques.
“The financial industry is looking for more specialised mandates and more focused portfolios and generalist trusts are trying to respond to that,” says Nick Greenwood, the chief investment officer of Iimea, the investment house.
This year, Invesco Perpetual lost the contract for its City & Commercial trust to Cayenne. Managers of the new Cayenne Trust have transformed the fund into an absolute return fund, which through the use of derivatives, intends to profit in both bull and bear markets.
Cayenne has also agreed to buy back shares if its discount widens beyond 5 per cent (the discount measures the extent to which the share price of an investment trust is lower than the value of its underlying assets).
Most importantly perhaps, changes in remits on investments mean that funds are moving away from bonds and stocks towards assets such as property and private equity.
Alliance Trust, which recently announced it intends (subject to shareholder approval) to merge with its sister company Second Alliance, recently hired a manager to oversee its property investments and has opened an office in Hong Kong to scout for opportunities in Asia.
Portfolios have also become more focused. Scottish Mortgage, one of the trusts with the best performance records, has narrowed its portfolio to 90 stocks. Witan has become a multi-manager fund. And Foreign & Colonial has outsourced the management of its Japanese, US and private equity portfolios.
“I think the consensus that managers of trusts have come to is that no single manager is good at picking stocks in every region, so focus is key,” says Charles Cade, head of research at Close Wins.
Managers of investment trusts are trying to use their capital structure to their advantage. To qualm fears about discount volatility, many have introduced so-called discount control mechanisms.
The existence of the discount is one of the reasons why investment trusts are an attractive investment vehicle for private investors, as it effectively enables you to buy assets cheaply.
But it is also one of the factors that makes them higher risk than other vehicles, because it is an extra factor that affects returns. In the past year, discounts have narrowed.
The average share price of the generalist trust is up 37 per cent in the year to the end of March, according to the Association of Investment Trust Companies. Gearing, or the ability of trusts to borrow, helped returns.
The average generalist trust has a gearing level of 9 per cent, according to the Association of Investment Trust Companies.