What investment trusts are Morningstar.co.uk readers favouring this month? Global equity closed-end funds make up two of the top three – opting for a geographical diverse fund could be a reflection of concerns about the domestic market, or US valuations. The third most popular is a UK smaller companies trust, a contrarian choice as UK small and mid-sized companies have been out of favour since the Brexit vote. All three trusts hold a Morningstar Analyst Gold Rating.
Scottish Mortgage (SMT)
“The approach pursued here is unapologetically unconstrained and relatively concentrated, so investors can expect substantial divergence versus the index and peers,” says Morningstar analyst David Holder. “Indeed, the active share of 95% which suggests very little commonality with the benchmark.”
It’s an approach that has paid off, the trust earns a five-star performance rating, having returned an average of 18% a year for the past 10 years.
The investment culture at parent company Baillie Gifford is moulded by its own partnership structure and is based on the premise that long-term patient and active investment management delivers higher-than-average returns over the long term. The team take a minimum five-year view when looking at companies to allow competitive advantage and management skill to come to fruition and some 55% of the portfolio has been held for over five years.
The dividend has been increased every year except for two over the past 42 years.
Murray International (MYI)
Murray International has a dual mandate: The aim of the company is to achieve a total return greater than its benchmark by investing predominantly in equities worldwide. Within this objective, the manager seeks to increase the company’s revenue in order to maintain an above-average dividend yield. An additional but informal objective is preservation of capital.
It has struggled in recent years, only earning a two-star performance rating ranked against peers – but Holder says it is likely that over the longer term it is very likely investors will be rewarded for their patience.
“Many Aberdeen mandates, including this fund, suffered performance-wise from 2013 to 2015. Value investing returned to favour in 2016 and broader risk appetite picked up for Asian and emerging-markets equities. It is heartening to note that the investment approach didn’t deviate,” he said.
“How the fund will fare in the future is of course unknown, but it is a reminder to investors that this fund can be volatile and go through some extended period of underperformance.”
BlackRock Smaller Companies (BRSC)
BlackRock Smaller Companies aims to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies, and remains one of analysts highest-conviction picks in the sector. The trust’s average market cap is modesty below that of the benchmark but substantially less than the peer group.
The fund has an increasing exposure to AIM-listed holdings with board approval to invest up to 50%, which can enhance volatility, although the close-ended nature of the structure mitigates liquidity concerns to some extent.
“Mangers Mike Prentis and Roland Arnold are a very capable pair of hands within a well-resourced team,” said Holder. “Their experience in smaller companies' investing is arguably more important than might be the case in other parts of the market, given the potential pitfalls for investors, and is a driving factor for our continued conviction here.”
