Making better use of global trusts

For investors with larger portfolios, one or two Global trusts could form their core equity allocation, with 'satellite' investments held alongside - small allocations to higher-risk specialist funds that could supply an additional boost.

They are also very useful for investors with small portfolios, for example those starting a stocks-and-shares individual savings account (Isa) who don't have enough money to meaningfully allocate across several regional and country funds. They are also good vehicles for saving in a junior individual savings account (Jisa) as you have an 18-year investment horizon, or for investors who don't have the time to allocate their equity investments.

If your portfolio is UK-focused a Global trust can add numerous other markets at low cost. But Global trusts are also likely to include some UK exposure, so watch out for any substantial overlap.

Global 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. And because they are diversified they are arguably lower risk than funds focused on one region or country. Mona Shah, senior research analyst at Rathbones, also says that the power of regional funds is being diluted as companies' revenue streams become more international.

Global trusts have, on average, outperformed open-ended investment companies (Oeics) and unit trusts over one, five and 10 years.

Global trusts vs Global open-ended funds: what £100 has grown to

Source: Association of Investment Companies (AIC)/Canaccord Genuity. Shows shareholder total returns to 30 June 2015.

Notes: The investment company data is unweighted share price total return performance figures on a mid-price to mid-price basis. Oeic/unit trust data is unweighted total return performance figures on a bid price to bid price basis.

Investment trusts' lower fees used to give them a competitive edge, but with the move to cheaper, non-commission-paying share classes on open-ended funds there is now not such a cost differential. Open-ended funds typically have an ongoing charge of between 0.8 and 1 per cent, although many Global trusts still charge less than this.

Investment trusts can also take on debt, known as gearing, to invest more than their assets. "This is likely to add value in the long term, but is detrimental in a downturn," says Simon Elliott, head of the investment trust research team at Winterflood. "And it is easier to run a portfolio with a captive pool of capital, especially when investing in smaller companies or illiquid investments."

Investment trusts do not have to sell assets to meet redemptions when investors withdraw their money: if you want to exit a trust you have to sell your shares on the secondary market. But this enables investment trust managers to take a longer-term view on holdings and invest in opportunities that will be profitable in time.

Choosing a trust

The Global sector is very diverse, with some trusts invested purely in equities and others invested in a range of different asset classes. Some are volatile and others try to preserve wealth. This means it is difficult to compare them with each other, so it can be better to measure them against appropriate indices, or in the case of more defensive trusts look at their absolute returns. Consider each trust's underlying strategy, details of which you should be able to find in its annual report. Make sure you know what the trust's asset allocation is, and keep monitoring this as it could change.

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

"For me the most important factor when choosing a trust is how it will perform in future," says Peter Hewitt, manager of fund of investment trusts F&C Managed Portfolio (FMPG)*. "I consider its investment approach and what it invests in - my view of the potential for the asset performance over the medium term. I also have an eye to the rating and the discount, but these are not the dominant factors in my stock selection."

If you are only able to hold one Global trust, ensure it is broadly diversified. As your portfolio grows you could add trusts - for example, a defensive one alongside a high-growth one.

There is a wide variance in their performance and whether they trade on discounts or premiums to net asset value (NAV). "I am happy to recommend equity-focused trusts at a premium around NAV, but am wary of extended premiums," says Mr Elliott. "When equity trusts hit a period of soft performance the premium erodes, so trusts on a higher rating have a long way to fall. I prefer trusts that manage premiums by issuing shares.

"Consider the downside risk to the premium or discount. Scottish Mortgage Investment Trust (SMT)* is willing to buy back shares so even in very difficult conditions it would be unlikely to move to a double digit discount. Witan (WTAN)* has bought back shares even when the discount is at a tight level, demonstrating its willingness to do this, so we expect it to trade at relatively tight levels."

Differentiated approach

In the past, Global trusts were one of the few options for investors wanting a broad basket of global equities. But investors can now opt for trackers or exchange-traded funds (ETFs) at a much lower cost. "Global sector trusts need to have a clearly defined investment approach which sets them apart, or makes them a bit different from others, rather than just offering an exposure to global equities," says Mr Hewitt.

"Foreign & Colonial Investment Trust (FRCL) is very actively managed in terms of its asset allocation and has an identifiable investment approach," he says. "That is what I would look for in a trust."

Foreign & Colonial and RIT Capital both offer exposure to private equity, differentiating them from sector peers.

"Witan has hired specialist managers to run certain areas, but the in-house team still takes responsibility for the asset allocation and has selected some direct holdings," continues Mr Hewitt. "All three funds have taken different approaches and it has paid off for them."

Despite being a manager of managers fund Witan has a reasonable ongoing charge of 1.02 per cent, and has beaten the Global sector average and global equity indices over one, three and five years. Mr Elliott adds that it is a lower-risk option than some of the other trusts in the sector, including Scottish Mortgage, and has a good portfolio of underlying managers. He adds: "Both Witan and Scottish Mortgage are well managed and have performed strongly, and could be good long-term savings products."

Scottish Mortgage has made some of the best returns in the Global sector over one, three and five years. The trust's managers invest for the long term with an emphasis on identifying disruptive companies. This means it has a significant weighting to technology stocks. But, because there will be times when its managers' views are at odds with the market, there could be times of volatility.

Mr Hewitt says Scottish Mortgage and Edinburgh Worldwide (EWI) have "a very clear investment approach".

Edinburgh Worldwide is focused on small and medium-sized companies and is growth-orientated, which means it could be more volatile. But it has made returns well in excess of its sector average and broad Global indices over one, three and five years.

Alliance Trust (ATST) was a traditional global equities fund, but last year adopted a socially responsible investment overlay strategy in its stock selection, and over one year it has beaten the Global sector average and MSCI World Index. However, analysts and investors are generally of the view that it is too early to say how this will go.

Mr Hewitt also likes Law Debenture Corporation (LWDB)*. "This is UK-orientated, but is different to Lowland (LWI) which is run by the same manager, James Henderson, offering both capital growth and income," he says.

Law Debenture yields more than 3 per cent and has made strong returns over five and 10 years. The trust trades on a premium to NAV approaching 10 per cent, but this does not account for revenues it gets from a trustee business, which if taken into account would result in a lower premium.

*IC Top 100 Funds

Performance of Global trusts mentioned in article

Source: Morningstar, AIC. Performance data as at 13 October 2015