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Improving an investment-trust-heavy Isa portfolio

Tom is 60 and holds 26 investment trusts in his individual savings account. Our experts suggest he consolidate the holdings and introduce some new positions.

Tom is 60 and has been investing "meaningfully" since personal equity plans (Peps) were introduced by Nigel Lawson in the 1986 Budget to encourage equity ownership among the wider population. He has a firm conviction in favour of shares and investment trusts, in particular. This has led to him collecting 26 investment trusts, which he holds alongside open-ended funds, trackers and direct shares.

He says: "Contrary to the normal 'risk analysis' jargon, I believe that for long-term returns only shares will do. Certainly, historically the stock market has outperformed bonds and cash spectacularly since the late 19th century. My key caveats are:

■ When markets underperform, it is essential to hold one's nerve and not sell.

■ Trying to time the market is risky.

■ The above assumes that one invests in good quality stocks in a way that avoids unnecessary risk."

Tom's portfolio is held in individual savings accounts (Isas) and includes his wife's holdings, too. Between them, they have almost £1m in Isas. "I treat them as one portfolio and would like to get a good return compared with usual benchmarks," he says. "These are not our only investments or source of income, but they are the only ones managed by me. I am fortunate in not being dependent in the short or medium term on the performance of our Isa portfolios."

Reader Portfolio
Tom 60

Individual savings accounts


Beat the 'usual benchmarks'



Name of holdingNumber of shares/units heldPriceValue %
Investment trusts: 
Aberdeen Asian Income Fund (AAIF)10051163.25p£16,4082
Aberdeen Asian Smaller Companies IT (AAS)2351727.25p£17,0972
Alliance Trust (ATST)4075485.5p£19,7842
Baillie Gifford Shin Nippon (BGS)3124391.73p£12,1371
Biotech Growth (BIOG)2848623.6p£17,7602
City of London (CTY)6148392.28p£24,1173
Finsbury Growth & Income (FGT)10416580.05p£60,4186
Fundsmith Equity I Inc (GB00B4MR8G82)19644£2.01£39,4844
Henderson European Focus Trust (HEFT)20061043.8p£20,9382
JP Morgan American IT (JAM)8860264.38p£23,4243
Jupiter European Opportunities (JEO)9376550.57p£51,6216
JPMorgan US Smaller (JUSC)18230179.25p£32,6773.5
Polar Capital Technology Trust (PCT)1716551p£9,4551
Scottish Mortgage (SMT)20030247.03p£49,4805
Temple Bar (TMPL)33881090p£36,9294
Worldwide Healthcare (WWH)25881716.34p£44,4185
Baillie Gifford Japan (BGFD)8801433.75p£38,1744
Edinburgh Investment Trust (EDIN)3760714.5p£26,8653
Invesco Income Growth (IVI)8017283.5p£22,7282
JPM Global Emerging (JEMI)1180991.66p£10,8241
Law Debenture (LWDB)4400515.29p£22,6722
Murray International (MYI)2427872.59p£21,1772
New India (NII)12049320.47p£38,6134
Perpetual Income & Growth (PLI)13122415.61p£54,5366
Schroder Oriental (SOI)11588181.88p£21,0762
Schroder Oriental Smaller (SST)2088739.05p£15,4312
Witan (WTAN)2702762.8p£20,6102
Legal & General Pacific Index I Trust Inc (GB00B0CNGX10)5855172.02p£42,1684.5
HSBC FTSE 250 Index C Fund Inc (GB00B80QFZ35)12528£1.58£19,7942
SPDR S&P 500 UCITS ETF (SPX5)112£130.12£14,5732
iShares Core MSCI World UCITS ETF (SWDA)5642658p£14,9912
Legal & General UK Index I Trust Inc (GB00B0CNGM05)15564141.1p£21,9602
Legal & General European Index I Trust Inc (GB00B0CNGQ43)9872215p£21,2242
Legal & General Japan Index I Trust Inc (GB00B0CNGV95)5538538.22p£21,1682
Individual shares: 
BAE Systems (BA.)910465.1p£4,2320
British American Tobacco (BATS)1503722.5p£5,5831
Imperial Tobacco (IMT)1523438.5p£5,2261
Young & Co Brewery ‘A’ (YNGA)2971213.3p£3,6030
TOTAL £943,375100

Source: Investors Chronicle as at 7 October 2015



Sold Templeton Emerging Markets, reduced Law Debenture, purchased Witan.


Law Debenture (underperformance?) and Biotech Growth (toppy?).



Chris Dillow, Investors Chronicle's economist, says:

You say that, for long-term returns, "only shares will do". Historically speaking, this has certainly been true. Researchers at Credit Suisse estimate that since 1900 global equities have given a real return of 5.2 per cent per year compared with just 1.9 per cent on bonds: over 115 years, this difference compounds wonderfully.

However, it is dangerous to rely on history repeating itself. As Bertrand Russell wrote: "The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken."

For one thing, theory tells us that equities shouldn't outperform bonds by very much - only around 0.5 percentage points per year rather than the 3.3 points we've seen. And in the past 30-odd years, theory has been right.

And for another, there is a danger - albeit unquantifiable - that western economies will stay trapped in secular stagnation. If so, even long-run equity returns might be poor. This is no mere abstract possibility. In Japan, share prices are lower now than they were 25 years ago. Back in 1990, Japanese investors looking at history might well have concluded that only shares will do. And like Russell's chicken, a more refined view of nature would have been useful to them.

Equities might well, therefore, be riskier than you think.

In fact, this is true of your portfolio in another way. If you hold lots of investment trusts you might not be as diversified as you think. One reason for this is that some of them hold the same stocks. For example, Temple Bar (TMPL), Perpetual Income and Growth (PLI)* and City of London (CTY)* investment trusts all have big exposure to British American Tobacco (BATS), BP (BP.), AstraZeneca (AZN) and BT (BT.A). Also, pretty much any basket of stocks will be correlated with other baskets simply because they are correlated with the global market. For example, looking at annual returns since 2000, Finsbury Growth and Income (FGT)* has a correlation with Temple Bar of 0.91 and with Perpetual Income and Growth of 0.87, with +1 indicating perfect positive correlation. This means that if one falls significantly it is overwhelmingly likely that the others will too.

Just because you are holding lots of different assets doesn't mean you are spreading risk. Pretty much all your holdings are exposed to global equities and so would do badly if the market tumbles.

You say that it is essential not to sell when markets underperform. I'm not sure about this. You are absolutely right if the market simply dips and then recovers. But there is another possible pattern for returns. If markets are driven by momentum and herding, then rises follow rises and falls lead to more falls. With this pattern, it would be sensible to sell when markets underperform, because that would be a harbinger of further underperformance. In such a case, a simple rule to sell when prices fall through a 10-month average might help protect you; such a rule would also protect you from the danger of sustained price falls due to secular stagnation.

I don't say all this to suggest that you are wholly wrong. Insofar as you don't rely on this portfolio for day-to-day living expenses you can afford to take more risk than others. And we are approaching the time of year when it pays to take equity risk: 'buy on Halloween' has worked wonderfully well for years.

Nevertheless, I would caution you that you are exposed to a lot of risk, which means this portfolio is not for everyone.



Stephen Peters, investment analyst at Charles Stanley, says:

This portfolio owns many excellent trusts and funds, and credit to you for constructing it. I would make a few suggestions and observations.

Owning six UK equity income trusts is somewhat unnecessary. There is huge similarity between portfolios, especially as three are run by managers at Invesco Perpetual. I would consolidate into Edinburgh (EDIN), Temple Bar and Finsbury Growth and Income, and buy UK equity smaller companies trusts with some of the cash - perhaps Aberforth Smaller Companies (ASL) and/or BlackRock Smaller Companies (BRSC)*. I’d also note that your direct share holdings are all owned in size by these trusts and may be worth consolidating.

In such a well-constructed and well-diversified portfolio I see little point in owning Alliance Trust (ATST) and Witan (WTAN)*. However, if one had to choose, I would go for Witan and sell Alliance Trust.

In general, it has been easier for active equity managers in recent years to outperform in the UK and Europe, and exceptionally hard to do so in the US, emerging markets and globally. I'd consider buying a passive fund or exchange-traded fund (ETF) to replace JPMorgan American (JAM), or Fidelity American Special Situations Fund (GB00B89ST706)*. I'd consider adding JPMorgan European Smaller Companies (JESC), the Aptus Global Financials Fund (GB00B796C343)*, taking a little profit in Worldwide Healthcare (WWH)*, buying Fidelity Asian Values (FAS), and sell the UK, Asian and European index trackers.

Profit-taking in Scottish Mortgage (SMT)* with the proceeds put into Monks (MNKS) might also be worth considering, given the relative valuations of the two. I note your awareness of the underperformance of Law Debenture (LWDB). This is a firm favourite of many in the sector given its unusual structure. James Henderson is a very highly regarded fund manager, so if you are willing and able to hold it while it is underperforming (you make no mention of Murray International (MYI) that has also performed dreadfully but for perfectly understandable reasons in the past few years) then I would suggest you do so.

I'd make small investments in some out-of-favour, unloved funds or sectors. Consider Charlemagne Magna Latin American Fund (IE00BKRCMN58), British Empire Securities and General (BTEM)* and/or BlackRock World Mining (BRWM). Maintaining a position in Temple Bar is definitely contrarian, but manager Alastair Mundy's time will come again.

While I don't know what other assets you have, some diversification away from equities across all your total assets is not a bad idea. As the saying goes, diversification is the only free lunch in financial markets.


Gavin Haynes, managing director at Whitechurch Securities, says:

You have built up a large portfolio over time including many good quality names in the investment trust world and a spread of investments that is diversified across global stock markets.

However, the portfolio is spread very thinly over a large number of holdings. When managing a portfolio of collective investments, I would rarely have more than 20 holdings and have 25 as a maximum. The portfolio has 38 holdings with many positions below 3 per cent. I would sell some of the small positions and increase conviction.

Your Asian exposure is spread across five funds, including a tracker and two smaller-company funds. There is some element of overlap here and it is worth considering a more focused approach.

You are keen to utilise investment trusts and when doing so it is important to exploit the discounts and beware of premiums. This may well be your rationale for considering selling Law Debenture, which is trading on a significant premium to NAV.


There is some scope within the portfolio for rationalisation by moving between trusts that are trading on a premium into those trading at a discount. Alliance Trust is on a significant discount, which could close if recent restructuring proposals are successful.

The portfolio contains core tracker funds that provide a cheap exposure to key areas. However, looking at the percentage allocations, it is unclear if this is supposed to form part of a core, satellite investment approach. I would rationalise some of these holdings (eg Japan, which is a market that I believe can be better accessed via active managers).

You are not afraid to invest in more speculative areas of the market. You will have done very well in your exposure to biotech and technology and it could be a good time to bank profits. If you are prepared to take a long-term view, you may consider replacing them with deeply out-of-favour emerging market trusts.



Mr Haynes says: The portfolio holds four direct equities: BAE Systems (BA.), British American Tobacco (BATS), Imperial Tobacco (IMT) and Young's Brewery (YNGA). While these are in the main quality blue-chip stocks, they are very small holdings at under 2 per cent of the portfolio in total. The purpose of these direct equity share holdings seems unclear and exposure to these stocks is almost certainly obtained through some of the investment trusts held. You should consider why you are holding these stocks and what you are hoping to achieve from the holding as such small amounts add very little to a portfolio of this size.