In James Anderson’s valedictory annual report on Scottish Mortgage Investment Trust (SMT), he castigates the “near pornographic allure” of earnings announcements and macroeconomic headlines on which too many investors place too much emphasis. It’s true that the best fund managers have tended to have a buy-and-hold approach, and judging them on short-term performance could do more harm than good. Most fund managers ask you to assess them on a rolling five-year basis, if not longer.
That said, there are a number of things you should monitor to make sure an investment trust still fits the bill. To start, I’d recommend creating a list on the Association of Investment Companies' website. You can register an account for free and add your investment trust holdings to a watchlist. The portal contains much more information than most investment platforms. This includes key company documents, a link to regulatory announcements and some harder-to-come-by information such as dividend cover, revenue reserves, gearing levels and historic fluctuations in the discount and premium. It is also an efficient way to measure a trust against its peers – remember that net asset value (NAV) performance is a better measurement of manager skill than the share price.
An obvious thing to keep on top of is any change in manager. This can happen more often than you might think. Ryan Hughes, head of active portfolios at AJ Bell, notes that there has been a surge in manager changes over the past 18 months with boards becoming more assertive in a world with more scrutiny on governance.
In a similar vein, check that a trust's investment policy hasn’t changed. Major changes go to a shareholder vote for approval, and reading a trust's interim and annual reports should give you plenty of insight into its manager's approach.
An advantage of investment trusts over open-ended funds is that they have to notify the stock exchange if certain events occur, such as director dealings, a change of board member, or a decision to issue or buyback shares. In most instances, these will not affect your investment case for the trust but it is worth keeping an eye on. If a significant shareholder is selling its holding in a trust, for example, this might be a sign that they have lost faith in the manager. You can set up an email alert on London Stock Exchange to notify you of any filings.
If you are investing for income, check the dividend cover. While many equity income trusts paid part of their recent dividends out of revenue reserves, as expected given the fall in dividends, if they are uncovered for a long period of time this will eat away at your capital returns. Gearing (debt) is worth keeping an eye on too as it can indicate how bullish a manager is on the sector the trust invests in and add to volatility.
If a trust is on a much higher premium to NAV than its longer-term average, consider taking some profits. If it is at an unusually wide discount, it might be an opportunity to add to it. But make sure you do your homework because there may be good reason for it.
Ultimately, a good test is to ask: “would I buy this today?” If the answer is no, question why you still hold it. It might be worth rebalancing if you have held trusts for many years, especially as ones with a growth style have had such a strong run over the past decade relative to a value style but recently there have been signs of a reversal.
