Should you buy generalist or specialist?

Over the past few years many investment trusts focused on non-equity, alternative assets such as renewable energy and niche property sub-sectors have launched. But while they might appear more interesting, you need to consider what role they can play in your portfolio or whether your investment goals could be met just as well or better by an older, broader trust.

Some of the larger trusts in the Association of Investment Companies (AIC) Global sector have exposure to areas other than mainstream equities. For example, Scottish Mortgage Investment Trust (SMT) had 19.5 per cent of its assets in unquoted companies at the end of September and F&C Investment Trust (FCIT) had 9.3 per cent of its assets in private equity at the end of June. But these and other large Global sector trusts are still largely focused on equities and are not going to give you the specific exposure to, say, wind farms, battery storage facilities or supermarket buildings that niche trusts will. Conversely, a handful of the latter will not give you anything like the broad exposure of a Global sector trust – the kind of core, basic exposure most investors should have.

It can be harder to assess what return profile many non-equity trusts will have because they have launched fairly recently and don't have much of a performance record. So, when considering such a trust you should assess the nature of the assets it invests in, what drives its returns and whether these drivers are the same as for the mainstream equities funds you hold – eg, how correlated they are.

But also remember that you are buying the shares of these trusts rather than the assets they invest in so you won’t necessarily get the returns of the asset. There is a risk that these trusts’ share prices could move more in line with mainstream equities so you might not get the diversification you are looking for.

Rather than holding either broad, Global trusts or esoteric non-equity trusts, you may be better off holding both. But if you are keen to choose your own equity exposures, you could hold esoteric trusts alongside a diversified selection of mainstream equity funds.

Having various regional equity and specialist non-equity trusts makes it easier to determine your geographical allocation. Taking this approach is suitable if you are interested in doing investment research, and keeping up to date with markets and assets. You should also be prepared to pay higher fees for certain funds and have higher overall costs of running your portfolio, as you will pay more sets of fund and trading fees. You also need to monitor and regularly rebalance your portfolio to ensure that it maintains the allocation you intend it to have.

So this approach is probably best if you have a larger portfolio and can ensure that it is well diversified. A risk of buying niche funds is that if you add too many or the proportion of your portfolio that they account for becomes too great, your overall portfolio could become too niche and more volatile. 

Also, even if you think that you are holding a selection of funds that are very different to each other, if their holdings are driven and affected by similar factors, your funds’ returns might be very correlated to each other.

Rob Morgan, chief analyst at wealth manager Charles Stanley, says that if you want specific exposure to esoteric asset trusts it can make sense to take a ‘core and satellite' approach. This involves putting the majority of your money into funds focused on more mainstream assets – ‘the core’. This could be composed of one or two global equity funds, or a well-diversified selection of regional equity, and maybe some bond funds. And alongside these you have ‘satellites’ – small allocations to more esoteric and-non equity funds.

But it is easier to monitor a smaller number of trusts and you don’t have to worry about asset allocation. “A large, broad fund would suit a ‘hands-off’ investor who doesn’t want to do too much monitoring, small portfolios, and buy and forget investors,” says Morgan.

Large, broad funds tend to have cheaper fees than smaller funds focused on esoteric assets. For example, Alliance Trust (ATST) , Bankers Investment Trust (BNKR), F&C Investment Trust and Scottish Mortgage Investment Trust have ongoing charges of 0.65 per cent, 0.5 per cent, 0.52 per cent and 0.34 per cent, respectively, according to the AIC. But the ongoing charges of Renewable Energy Infrastructure sector trusts are mostly in excess of 1 per cent, and Gore Street Energy Storage Fund (GSF) has an ongoing charge plus performance fee of 2.74 per cent.

Property and private equity funds also tend to have ongoing charges above 1 per cent and in a number of cases higher than 2 per cent. This can be because of performance fees – something that most Global sector investment trusts don’t have.

This means that holding one or two broad funds tends to be a more suitable approach for small portfolios, as the fees of several funds and trades would eat into a considerable portion of their returns.

But if you hold just one or two funds it is still very important to pick suitable ones. For example, Morgan argues that Scottish Mortgage Investment Trust is not a balanced, one-stop-shop portfolio because of its allocations to areas such as unquoted companies and technology. This trust can experience bouts of volatility and it is not suitable unless you have a fairly high risk appetite.

Multi-asset investment trusts have allocations to alternative assets. For example, RIT Capital Partners (RCP) had 19 per cent of its assets in hedge funds and bonds, and 31 per cent in private equity at the end of September, with only about a third in conventional equities. This trust could form the core of certain portfolios as it is well diversified. However, RIT Capital Partners’ low equity content and wealth preservation mandate means that if you need strong growth over the long term it may not be the best option – as is the case with other multi-asset funds.

A risk of putting all or most of your investment portfolio into one fund is that if it does not do well neither will your portfolio’s overall return. And managers of broad trusts are not specialists in all areas, so make sure that the firm they work has other specialists to research those areas or that they outsource this allocation to experts on that area.