When choosing an investment trust, or any type of fund for that matter, the number one consideration is that it suits your objectives and profile, including the asset allocation that you have decided is the most appropriate way for you to meet your financial goals. When you have determined this and are looking at the different fund options to get exposure to each of the asset areas you have chosen, key considerations include its performance and costs. But even if an investment trust is in a sector you are looking to get exposure to, and has good performance and low charges, it still might not be suitable for you.
The reason for this is that different trusts within the same sector have different approaches and focuses, meaning they have different risk levels. If you are considering equity investments you should have an investment horizon of at least five years, and be able to take on a good deal of risk. But many types of investors meet these basic criteria. So, for example, global equities could form a part of a portfolio of both an investor who can take on a reasonable amount of risk, and of one with a time horizon of many decades and high growth objective who can afford to take on much greater risk. But because of their differences, the same global equity fund may not be the best option for both of them.
For example, Scottish Mortgage Investment Trust (SMT) is one of the best performers of all Global investment trusts and has beaten broad global indices such as FTSE World and FTSE World ex UK over three and five years. It is also one of the cheapest active funds available with an ongoing charge of 0.37 per cent.
But it is also a high-risk fund. It has a substantial allocation to technology stocks, which can be very volatile. It holds 38 unlisted investments, which accounted for 18 per cent of its assets at the end of last year. Unquoted investments are typically higher risk because they can be at an earlier stage and more likely to fail, or less transparent than listed shares. Scottish Mortgage also has nearly a quarter of its assets in China and India – emerging markets that are high-risk and can be volatile.
So if you do not have a very high risk appetite Scottish Mortgage Investment Trust might not be suitable for you, and it might be worth paying a bit more for a potentially less volatile global fund.
Options include Monks Investment Trust (MNKS), which has a higher but still very reasonable ongoing charge of 0.52 per cent. This trust is also run by Baillie Gifford, but by a different team with a very different approach. It is far less concentrated, with its top 10 holdings accounting for about 23 per cent of its assets, in contrast to Scottish Mortgage, which has 51 per cent of its assets in its top 10 holdings. Monks also does not invest in unquoted companies.
Good open-ended global funds that take a less aggressive approach include Rathbone Global Opportunities (GB00BH0P2M97), which can be bought for 0.53 per cent or 0.79 per cent, depending which investment platform you use. This fund also does not invest in unquoted companies and largely avoids companies listed in emerging markets.
Conversely, it might be that an investment trust or fund does not take enough risk to have the possibility of delivering the higher returns you want. So, for example, City of London Investment Trust (CTY) is an excellent low-cost option for income investors. It has increased its dividend every year for 52 years, and paid 17.7p a share in respect of its last financial year so has an attractive yield of about 4.5 per cent. It also makes good total returns over the long term, beating the FTSE All-Share index. But it sometimes lags sector peers which allocate to smaller companies that can deliver stronger growth. This is because City of London Investment Trust tends to focus on stable, dividend-paying larger companies which don’t usually offer the strongest growth. So if you want the opportunity for higher growth with your income and can take on greater risk, it could be better to invest in a higher-risk, potentially higher reward equity income fund.
Equity income funds with the potential for higher growth include those with smaller companies exposure such as Diverse Income Trust (DIVI), which has an ongoing charge of 1.13 per cent, or Chelverton UK Equity Income (GB00B1FD6467), which has an ongoing charge of 0.86 per cent.
