Best global investment trusts

Global investment trusts are more flexible than single country or regional funds in that they can move in and out of areas to exploit opportunities and avoid risk. Because they are diversified they are arguably lower risk than funds focused on one region or country.

Many global trusts have been running for decades and in some cases more than 100 years, so have proven track records and impressive records of dividend increases (read more on this). A number of trusts in this sector have low ongoing charges relative to other sectors.

Global growth investment trusts tend to outperform global growth unit trusts and open-ended investment companies (Oeics). A recent study by Alan Brierley, head of research at Canaccord Genuity, found the average performance of global investment trusts beat the average performance of global open-ended funds over one, five and 10 years. "I think the closed-end structure gives them distinct advantages in periods of market volatility, as we are currently experiencing, compared with an open-ended fund where managers might be grappling with panic driven outflows," adds Jason Hollands, managing director at wealth adviser Tilney Bestinvest. "Of course it ultimately comes down to the quality of the investment team and process as to whether you choose an open-ended fund or investment trust."

How to use global trusts

For new investors who don't have the time or knowledge to allocate their investments globally, global trusts are a good solution. They are also useful for investors with small portfolios, for example starting a stocks and shares individual account (Isa), who don't have enough money to meaningfully allocate across several regional and country funds.

If you're a UK-focused investor with a portfolio of mainly UK shares, a global trust can add numerous other markets at low cost.

Investors with larger portfolios could use a core and satellite approach, holding one or more global growth trusts as the core, with small allocations to a few specialist funds to add some diversity and potential higher growth. In this case global funds could account for 50 per cent or more of your portfolio.

Some are multi-asset funds which target lower volatility so could work for investors who want something more defensive. They could account for up to around a quarter of your portfolio, though the allocation ultimately depends on how defensive you want to be.

Global growth trusts are good vehicles for saving in a junior individual savings account (Isa) as you have an 18-year investment horizon. Some of the trusts offer children's savings schemes, for example, Foreign & Colonial Investment Trust (FRCL) and Witan (WTAN). "Global growth trusts are a strong contender for the modest saver, for example, someone looking for a one stop, diversified fund, perhaps for a children's savings scheme or as a regular scheme," says Mr Hollands.

How to choose a global trust

The Global investment trust sector is very diverse with some trusts just invested in equities while others are multi-asset, some very volatile while others try to preserve wealth, and all on different discounts and premiums to NAV.

For example, IC Top 100 Fund Scottish Mortgage Investment Trust (SMT) offers long-term growth, Witan, also an IC Top 100 Fund, is a multi-manager fund and Foreign & Colonial Investment Trust gives some private equity exposure alongside listed equities.

For this reason you need to choose carefully and Mr Gilligan says it is very important to consider the underlying strategy, details of which you should be able to find in the trust's annual report on the trust's website. You should also make sure you know what the trust's asset allocation is.

You should check how long the trust's manager has run it and what returns he or she has made.

Mr Gilligan also suggests finding an attractive entry point, which is typically when a global trust is on a wider discount relative to its history and or the rest of the global sector. Typically this sector trades at a discount so he says in many cases it is probably best not to buy at a premium.

However, there are a number of exceptions to this. If a global trust offers a higher yield then it will typically trade on a narrower discount, or even a premium.

IC Top 100 Fund Personal Assets Trust (PNL), meanwhile, has a strict discount control policy so usually trades at a slight premium or around par, meaning timing entry is less of a concern with this trust.

See our professional picks for more detail on this fund

Read our update with its manager

Ewan Lovett-Turner, associate director, investment companies research at Numis Securities, says while you should be wary of global trusts trading closer to NAV you could mitigate potential widening by holding them together with a defensive trust such as Personal Assets or alongside a trust on a wide discount.

If you are only able to hold one global trust, ensure it is broadly diversified. As your portfolio grows you could add trusts, especially ones doing different things to each other - for example, a defensive one alongside a high growth one.

Some of the trusts in the Global sector are multi-manager or fund of funds, so you get even more diversity. But check the ongoing charge as these involve a double layer of fees and could cost more, although JPMorgan Elect (JPE) has an ongoing charge of 0.58 per cent, and IC Top 100 Fund Witan is reasonable at 1.15 per cent.

Risk

The global growth sector includes some of the largest and oldest funds in the investment sector, with six having market caps of over a billion. But the larger a fund gets, the more difficult it can become to move the performance dial, and persistent underperformance often manifests itself in the form of a big - and very visible - discount to (NAV).

Alliance Trust's (ATST) performance, for example, has not been good, and it has recently announced another manager change and has an activist investor on its share register. However, some hope that these two factors will improve performance and narrow the discount.

Read our tip on Alliance Trust

And Mr Hollands adds that "with just under half of the portfolio invested in North America, 22 per cent in the UK, 19 per cent in Europe, and 10 per cent exposed to racier markets, Alliance Trust is a good core equity investment."

As most global investment trusts are equity focused if world equity markets plunge they will be hit, while they could go down with UK equity markets even if their underlying holdings are doing better.

Global growth trusts are broadly diversified so 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 may fall less than these in difficult times.

Global growth trusts are exposed to currency risk, though this can be mitigated to some extent because their holdings tend to be large-cap multinationals 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.

Global growth trusts largely trade at discounts to NAV which can be volatile, for example if performance disappoints, so will not suit investors who don't want discount and premium volatility.

You cannot do your own equity geographic allocation because this is effectively outsourced to the manager, so global trusts are not suitable for investors who wish to have greater control over their portfolios or want a very specific allocation to a geography or sector.

Recommended global investment trusts

Mick Gilligan is head of research at stockbroker Killik & Co. He recommends Law Debenture Corporation (LWDB), because it invests in companies with good earnings growth over time, or in a specific niche that is benefiting from strong tailwinds. This investment trust aims to achieve long-term capital growth in real terms and steadily increasing income growth through globally and industrially diverse equities, but has a large proportion invested in the UK.

It also gets revenues from a trustee business. Law Debenture has beaten its benchmark, the FTSE All-Share index, over one, three, five and 10 years, and offers a relatively attractive yield of 3.2 per cent.

Law Debenture has a trustee business but the revenues from this are not fully reflected in the NAV, so it trades on a premium to NAV of around 9 per cent. However, Mr Gilligan says that if you take these revenues into account then this is more like a 1 per cent discount.

Mr Hollands recommends Caledonia Investments (CLDN) for investors wanting a greater bias to the home market, as half is typically invested in the UK and the remainder pretty much equally weighted across the US, Europe and Asia.

Mr Lovett-Turner adds that you could consider this trust a value opportunity on a discount of around 18.5 per cent. "It did have a fairly sustained period of unexciting performance but has been helped by exits from private equity and changes made by its most recent lead manager, Will Wyatt," he says. "It is now more income orientated and has a disciplined investment approach. If this is more widely recognised then the discount could narrow."

Read our update with the manager

Mr Hollands suggests Scottish Mortgage Investment Trust (SMT) "for investors wanting a more gung-ho approach". "Despite the conservative sounding name, this invests in high growth companies from China to the US, offering true active management but at very low costs," he says.

It beat its benchmark, FTSE All World Index, over one, three, five and 10 years, as well as being one of the best performers in the Global sector, and as a result has moved to a slight premium to NAV. And while the trust has good long-term prospects it is often hit in periods of market weakness.

Investors looking for a more defensive option could consider RIT Capital Partners (RCP). "This has a nice mix of long-only equities and funds, together with some hedge funds which reduce market sensitivity," says Mr Gilligan. "It has been cheaper (the trust is on a discount of 2.64 per cent against its 12 month average of 5.83 per cent) but it tends to trade at a tight discount."

The trust has not outperformed its peers over three and five years, however, in September 2012 it appointed a new investment director Ron Tabouche, and over one year the trust has outperformed its sector peers. His changes include making RIT Capital's portfolio more concentrated.

Read our update with its manager

But as a result of the improvements, the trust's discount to NAV has tightened and its trades on one of around 1.5 per cent as oppose to its 12-month average of 5.8 per cent.

Analysts at Investec had been negative on Bankers Investment Trust (BNKR) for more than a year given it was trading at a premium and not performing especially well. But they now believe it is "one to watch. The premium of Bankers has come off and the fund is trading at a discount of 5.23 per cent. For those who already hold the fund, or like the manager, then adding towards a 10 per cent discount should be attractive."

But they think there are more attractive funds in the sector such as Witan (WTAN) on a 3.37 per cent discount. Witan had been a perennial under achiever but since its current chief executive officer, Andrew Bell, joined four years age, it has consistently beaten its benchmark. It's a multi-manager global growth trust, so gives investors exposure to a wide range of investments - many of which they would not be able to access as small retail investors themselves. It also has a very reasonable ongoing charge so would make a good core portfolio holding.

• Note: Law Debenture Corporation, Scottish Mortgage Trust, RIT Capital Partners and Witan are all members of the IC's Top 100 Funds.

Performance of global sector investment trusts

Source: Morningstar

Performance data as at 10 October 2014

*Includes securities not listed in this table

WIN £5,000 TO INVEST IN AN INVESTMENT COMPANY

Investment trusts: Striking the right balance at Foreign & Colonial

Investment trusts: The professional picks 2014

Investment trusts: IC reader favourites

Investment trusts: Around the world in eight investment trusts

Investment trusts: How to buy investment trusts