Last month marked the 140th anniversary of the granddaddy of the multi-trillion-dollar investment trust industry. The £2.5bn Foreign & Colonial Investment Trust was launched in 1868, a full 50 years before unit trusts came on the scene.
Not only are investment trusts older than their more popular unit trust rivals, they’re also more successful. Investment trusts have outperformed unit trusts over the past five years, returning 243% against 171%, according to data from the Association of Investment Companies and Morningstar.
One reason is because they can “gear up”, or borrow money to boost returns. More importantly, they pay no commission to independent financial advisers and, unlike unit trusts, are not allowed to advertise. That means fees are lower, so more money goes to investors.
And now there’s another reason why investment trusts look attractive. While the net asset value of trusts has fallen in line with wider markets, discounts have widened as jittery investors have moved their money out of equities and into ‘safe’ sectors, such as cash.
This ability to get £1 worth of shares for less than £1 has always been a nice feature of investment trusts – but there’s another point that’s often ignored. As discounts widen, yields also creep upwards. “This means that you can buy an investment trust with a much higher yield than the equivalent unit trust, and when the discount comes back in, this provides additional capital growth,” says Jason Evans of independent financial adviser Kohn Cougar in What Investment.
Evans likes Perpetual Income and Growth (PLI), managed by star fund manager Neil Woodford. The fund invests in defensive sectors, such as tobacco and utilities, and trades on a 7.6% discount, but the yield of 3.4% is hardly stunning. Another option is the Aberdeen Asian Income Fund (AAIF). It pays a 4.9% dividend, and UBS reckons Asian dividends will rise faster than Western ones this year – but again, the 1.9% discount is by no means bargain territory.
The real discounts are to be found in – where else? – Japan. The JP Morgan Japanese (JFJ) fund, for example, trades at a 12.5% discount and pays a dividend of 1.6%. But the best bet for both income and growth – if somewhat risky – is Japanese commercial property. One promising stock in this area is the Prospect Epicure J-Reit (PEJR) – for more information, see our cover story: Where to find the best fruit on a withered vine.