Each week we ask an expert for tips on how to invest £10,000. This is the final part of our series focusing on investment trusts. Next week we will start a four-week series asking our experts for their thoughts on investing in the stock market for the first time.
If this was your new year resolution, Money thought you might want some help.
Investment trusts are like other funds managed by a professional, such as unit trusts, but they are structured as companies.
This means their shares can be traded on the stock market.
Ian Kavanagh, who works for the investment firm Hargreave Hale and has more than 18 years’ experience in the industry, says investment trusts have significant advantages over other types of fund.
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Kavanagh, 42, who lives near Alton in Hampshire with his wife and their three children, explained: “Investment trusts have a number of attractions for investors over the more prevalent, and more aggressively marketed, unit trust sector. Crucially, with a unit trust a fund manager may have to sell assets in order to pay investors who want to take their money elsewhere. This can be a distraction for the manager.
“Property funds, in particular, can be detrimentally affected by this feature, given the time it takes to buy and sell the underlying assets.
“Investment trusts have no such issues,” he added. “Investors can simply sell their shares if they want their money back.
“The price of investment trust shares, meanwhile, is determined by supply and demand. It means the share price can be trading at a premium or a discount to the underlying value of the companies it has invested in. Buying at a discount has obvious advantages.”
The trusts can also benefit income seekers. Kavanagh said: “Those investment trusts prioritising an income can take advantage of rules allowing them to smooth returns by setting cash aside in the good years, which can then be used to top up dividends in slower years.
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“These ‘dividend reserves’ have allowed the City of London Investment Trust, now managed by Job Curtis at Henderson, to post 50 years of unbroken dividend growth.”
Kavanagh concluded: “The current investment environment is uncertain, with an abundance of economic and geopolitical potholes lining the road ahead. My investment trust picks err on the side of caution.”
His selections are below. He would divide his £10,000 equally between his five chosen trusts.
3i Infrastructure (up 9.9% over a year)
The 3i Infrastructure fund invests in areas such as electricity distribution and oil storage, alongside projects such as the building of roads and hospitals. The attraction is the security of the regular income that the fund receives from these assets, allowing it to pay a gross yield of about 5% a year.
The top holdings include Elenia, a Finnish electricity distribution network, and Anglian Water Group in the UK. Its annual charge, which is paid on top of any platform or broker fee, is 1.4%.
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Tritax Big Box (up 10.1%)
This trust invests in huge logistics buildings (from 500,000 sq ft to 1m sq ft) that are let out to blue-chip companies — particularly those involved in retail. This is a high-growth area, with supply limited by planning and infrastructure constraints.
This will help drive some capital growth in addition to the healthy 5% dividend yield.
The top holdings include a 920,000 sq ft Morrisons warehouse in Kent and a 550,000 sq ft Amazon warehouse in Peterborough. The trust’s annual charge is 0.5%.
Worldwide Healthcare (up 17%)
This invests in the global pharmaceutical and biotechnology sector — an attractive area because its fortunes are not tied too closely to the economic cycle; people need healthcare regardless of the state of the economy.
The sector is also helped by broad demographic changes. For example, the ageing population and growing middle class around the world will ensure a rising demand for medical supplies and treatments. The top holdings include Intuitive Surgical, a US company that manufactures robotic surgical systems. The trust’s annual charge is 0.9%.
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Manchester & London (up 15.6%)
This is a technology and healthcare-focused trust that, in my opinion, seems under-appreciated by the market: it is trading at a 21% discount to the underlying value of its assets. As an aside, investors also qualify for an annual draw to win Centre Court debenture tickets at Wimbledon.
Its top holdings include Amazon and Alphabet, the parent company of Google.
Its annual charge is 0.9%.
Scottish Oriental Smaller Companies (up 31.5%)
Scottish Oriental offers broad exposure to the Asia Pacific region. As the name suggests, it invests in small and mid-sized companies that are predominantly exposed to the fast- growing domestic economies in Asia. It offers a marked contrast to the sluggish growth of western nations.
The top holdings include Minth Group, a Chinese producer of automobile body parts, and Amorepacific, a South Korean cosmetics company.
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The annual charge is 1%.