If you have pounds to put away for five to ten years, a bunch of investment trusts quoted on the London stock market make just about the safest bet.
Anyone wishing to save long-term in Sterling should look at investment trusts quoted on the London stock market. Managing assets worth £131.000 million, they number 456, compared with 11 in the Netherlands and 17 elsewhere in Europe.
British Government stocks have always been reckoned the safest bet (which is why they are called gilt-edged) in what remains a strong currency, but certain types of investment trusts are even better for avoiding the risk of depreciation through inflation and fluctuation. Moreover, fixed-interest investments worldwide provide meagre yields or some risk at present.
Ten investment trusts are themselves largely made up of both government and corporate bonds, while 26 more similarly buy sovereign debt, but the vast majority purchase shares (also called equities) in different companies, both British and foreign. And most invest across the board– from banking and mining to services and utilities – to spread the risk even more.
The oldest trust, now worth £2,913 million, is Foreign & Colonial which was launched for the man in the street back in 1868. That was at the height of the Industrial Revolution when Britain was the world’s workshop, complete with a railway-boom at home and shipping on the seven seas.
Scottish American followed in 1883; then Alliance in Dundee and Bankers in London brought the total up to 12 five years later, with a further five trusts launched in 1889. They all capitalised on imperial expansion – for example, Edinburgh Investment Trust put money into diamond mines – as well as the development of the United States and South America.
Out of 90 pioneers, 23 have survived both world wars as well as the Great Depression which ruined most American mutual funds. So tried and true was the British model that some of the oldest trusts’ managers subsequently branched out.
They established asset houses (nicknamed stables) that could also handle pensions and private clients. Several have created additional trusts, often specialised, in addition to absorbing early rivals. A modern example is that Temple Bar, launched in 1926, now belongs to Investec Asset Management of Johannesburg which added a London base in 1992. That was soon after the gigantic Globe, launched in 1873, was bought by the Coal Board pension fund.
For half a century, most asset houses have also offered what used to be called unit trusts (now known by the initials OEIC), pioneered in 1931 by Mercantile & General that eventually expanded into investment trusts. Both vehicles equally depend on diversification, but otherwise there are significant differences.
Open-ended investment companies issue units that are bought straight from the managers or through a financial adviser. But the pool and price of units will vary according to whether purchasers or sellers predominate. Oeics must keep cash in reserve for redemptions without being allowed to borrow money, so this cramps performance.
Shares in investment trusts, however, are traded only on the stock market, normally using a stockbroker although 31 asset houses offer direct savings plans, usually from £50 monthly. The capital is closed, yet the trust’s manager can borrow to buy more shares at bargain prices. If this so-called gearing reaches twice the value of net assets, however, it heightens risk.
Thus, investment trusts may be volatile short-term, but do better on average in the long run. Private investors lack the time, money, expertise and technology for sectoral or international research. Moreover, trusts’ managers deal in bulk at a relative fraction of the cost for small lots on top of negotiating cheap loans.
Next week, I will go through the bewildering variety of trusts as well as their strategies aimed at solid income or likely growth. Meanwhile, readers can get an overview from the Association of Investment Companies (AIC) website.
John Burke has been Amsterdam correspondent of the ‘Investors Chronicle’ and also covered mutual funds as deputy editor of ‘What Investment’.