Best trusts for global growth

The variety on offer has partly been forced upon the industry by an explosion in the number of trackers and other passive vehicles. There's less of a market for closet index-huggers. "They are all doing something a bit different," says Charles Cade, head of investment companies research at Numis Securities. "For example, Scottish Mortgage offers long-term growth, Witan offers a multi-manager fund and Foreign & Colonial Investment Trust gives you some private equity exposure alongside listed equities."

As a sector, global growth has performed well. According to the Association of Investment Companies' calculations, the average fund among the 29 in the sector is up 170 per cent over the 10 years to end-May, against a rise of 158 per cent in the FTSE All share and 156 per cent in the FTSE All World. But that average disguises some big variations in individual performance.

Big is not necessarily beautiful

The global growth sector includes some of the largest and oldest funds in the investment sector, with four having market caps of over a billion: Alliance Trust, RIT Capital Partners, Foreign & Colonial Investment Trust and Scottish Mortgage. But the larger a fund gets, the more difficult it becomes to move the performance dial, and persistent underperformance often manifests itself in the form of a big - and very visible - discount to net aset value (NAV).

Few are more acutely aware of this than Alliance Trust. The Dundee based group has failed to beat the sector average and major indices over longer periods, and its shares trade at a persistent discount to net asset value (NAV). That in turn has attracted the attention of activist hedge fund Laxey Partners, which has made various meeting requisitions (read more) aimed, it says, at boosting performance and closing the discount. So far, they have been defeated, but Alliance did take up one of Laxey's suggestions at the end of 2010: a discount control mechanism.

"There has been some stabilisation in the past four years following a lost decade," concedes Alan Brierley, director of investment companies at Canaccord Genuity. "The company successfully preserved capital by materially increasing liquidity ahead of the crisis... but the problem is it always seems to take one step forward and two back."

Others point out that the big discount does give investors a margin of safety and scope for big gains if it can improve performance - but add that there are plenty of better trusts to buy right now.

Been there, done that

Alliance Trust's problems will be all too familiar to Caledonia Investments, another venerable global growth trust. It is 18 months into a transformation process partly instigated by shareholder activism - but it still has little to show for it in terms of a narrowing discount.

Analysts at Oriel Securities argue that Caledonia feels like a value trap. "Sustained improved performance could take time and is needed to reduce the discount to 20 per cent or lower," they say. While Alliance Trust is now buying back its own shares, Caledonia's ability to do so is hampered by the presence of the founding Cayzer family on the share register. Buying back too many shares would trigger an obligation to make a general offer.

But Mr Cade says that Caledonia offers value and has a strong historic record marred by less impressive performance in recent years. Read our profile.

Other trusts that had their genesis in family-office-style wealth preservation are doing well, though. Ruffer and Personal Assets are both strong performers. "Personal Assets has posted impressive results, which give a taster of the further potential outperformance in the event of more challenging market conditions moving forward," says Alan Brierly, director of investment companies at Canaccord Genuity. "We like the focus on capital preservation and would highlight that equity exposure is just 51 per cent of NAV."

Meanwhile, RIT Capital Partners, another IC Top 100 Fund, has delivered NAV total return of 166 per cent over 10 years against 53 per cent for the FTSE All-Share, according to Winterflood, and recently announced a significant increase in its dividend (taking it from 4p to 28p) so yields 2.25 per cent (read our profile).

However, such track records don't come cheap - all three of these trusts trade at premiums to NAV.

Other options

For long-term growth, Mr Brierley suggests Scottish Mortgage but while this has good long-term returns, it is more aggressive in its investment strategy, so you should have a long-term investment horizon and be able to tolerate short-term volatility. Read our interview with the manager

Tom Tuite Dalton, analyst at Oriel Securities, suggests Mid Wynd International (read our interview with the manager): "This offers attractive long-term upside despite trading at a premium to NAV," he says. "Those wary of paying a premium for anything may wish to consider British Empire, which has a see-through discount of over 40 per cent, but which has suffered from discount widening of its underlying holdings in recent years.

"See-through discount refers to the fact that the underlying portfolio comprises holding companies and investment companies which themselves trade on big discounts to NAV (average of over 30 per cent). Therefore with the trust itself trading on a 10 per cent discount, the see through discount is 40 per cent."

Edinburgh Worldwide, Monks and Foreign & Colonial Investment Trust are other possibilities, he adds.

Global growth investment trusts

Source: Morningstar as at 2 July 2012

Source: Morningstar, *Alliance Trust.

Performance data as at 29 June 2012

Top 10 holdings as at 31 May 2012

Geographic allocation

Source: Morningstar, * Baillie Gifford.

Performance data as at 29 June 2012

Top 10 holdings as at 31 May 2012

Geographic breakdown

Source: Morningstar, *F&C.

Performance data as at 29 June 2012

Top 10 holdings as at 31 May 2012

Geographic allocation

Source: Morningstar, *RIT Capital.

Performance data as at 29 June 2012

Top 10 holdings as at 30 March 2012

Geographic breakdown

Risk

Though lower risk than regional or country funds, global growth funds are equity investments, so if, for example, world equity markets plunge because of an intensification of the eurozone crisis, they will be hit. Or they could go down with UK equity markets even if their overseas holdings are doing better.

Global growth trusts are broadly diversified, so they won't be the best-performing investment trust sector long term or when markets are rallying, lagging higher return sectors such as emerging markets. But they typically fall less in difficult times.

Global growth trusts are exposed to currency risk, though this is mitigated to some extent because their holdings tend to be large-cap multi-nationals which trade globally creating a natural hedge.

For these reasons global growth trusts should be held for the long term, at least five years, especially as they include exposure to areas such as emerging markets.

Finally, you cannot do your own equity geographic allocation because this is effectively outsourced to the manager.