InvestmentsJan 22 2016

Insight: Global investment trusts

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Insight: Global investment trusts

Global financial markets, although considered risky, are often the best places for higher returns when invested wisely. While performance is largely driven by market movements such as a central bank rate hike, or geopolitical events like elections, there is ample opportunity for investors to pick and choose the right regions.

Looking specifically at investment trusts, the Global sector offers diverse exposure to investors wishing to construct a balanced portfolio with countries that offer lucrative returns. While the trusts tend to be overweight equities, they can also select other asset classes such as cash or fixed income.

Global trusts can be more flexible compared with a single-country or a single-asset class fund since they are able to diversify opportunities and avoid risks. For example, a UK-focused fund will primarily have exposure to a single region and its markets and subsequently be more prone to bear the brunt of events impacting the UK stock market.

The majority of funds within the Global sector are benchmarked against the FTSE World or MSCI World indices. These funds are heavily exposed to North American equities, followed by the UK and Europe. Very few funds have exposure to emerging market countries due to the high chances of volatility.

The Association of Investment Companies (AIC) states that trusts within the Global sector are those with the objective to produce a total return to shareholders from capital growth and some dividend income.

Companies should also have less than 80 per cent of their assets in any one geographical area to be included within the sector.

Performance

The Global investment trust sector has seen positive returns on average. Table 1 shows the top 10 funds over five years based on an £1,000 initial investment, according to FE data. The average performance on a 10-year period for the whole sector was £2,043, and £1,466 over five years.

The best performing investment trust, according to the Table, is Lindsell Train, which returned £2,751 over five years. The trust, established in January 2001, invests globally with no limitation on the markets or sectors in which investments are made. The investment manager aims to allocate at least 80 per cent of investment to equities. It currently has close to 71 per cent invested in the UK, followed by 10.6 per cent in the US.

This is followed by the £3.1bn Scottish Mortgage Investment Trust, managed by Baillie Gifford, which returned £2,121 over five years. The company is the largest global generalist investment trust in the UK, having taken the title from Alliance Trust in 2014.

The trust aims to invest in technology – particularly companies that can ‘disrupt’ established industries and their ways of working. One example is Alibaba, a website that allows any business, regardless of their size, to find a supplier in China.

The company’s top 10 holdings include names such as Amazon, Facebook and Google. In terms of region, the fund is overweight North America with 46.8 per cent allocated to the region.

All funds listed in the Table have very high exposure to the US and the UK markets; four out of 10 have more than 70 per cent exposure to the UK. Standing out is Independent investment trust, also managed by Baillie Gifford, with 90 per cent allocation to the UK market.

The other six funds have close to 80 per cent of their allocation divided between the US and the UK market, followed by European countries including Ireland and Switzerland.

While the over-reliance on the UK market could suggest the economy is improving, it could also mean the funds are at risk, especially if events such as a rate hike from the Bank of England, or a referendum on leaving the EU come into play.

Risks

Although the Global sector is often considered lucrative, there are a number of risks investors should consider. These risks are quite similar to those facing any equity fund.

Fund managers point to the dependence on equity markets as one of the biggest challenges for this type of investment. While relying on equities, they are also exposed to regular market movements as a reaction to events such as plunging commodity prices.

The funds in the Table have increased exposure to the developed world, but there are also trusts with exposure to emerging markets. Taking the current performance of emerging markets in view, funds with exposure there may see higher risks compared with those with a high allocation to countries like the UK and the US.

Trusts in this sector can also some currency risk and due to the nature of this, fund managers advise investors to look at this as a long-term investment.

Investors looking for higher returns could often find global investment trusts to be an attractive option, but it is still essential to carry out proper due diligence and understand the market well.

It is also important to do proper research since equity investments can be risky. But once proper guidance is in place, the sector could offer attractive returns and be a part of a well-constructed and diversified portfolio.

Five questions to ask: Global Investment Trusts

Where do Global investment trusts invest?

Funds invested within the Global sector have exposure to equity markets and can invest in various countries around the world. Fund managers carry out proper due diligence before deciding to include a country in the fund’s portfolio.

What are the advantages of Global funds?

Investment in this sector can be better than single-country focus funds since they are able to diversify their risk across regions and sometimes asset classes too. In the case of a single-country fund, there is a higher risk to consider.

What is the cost of Global sector trusts?

The ongoing charges for funds in this sector range from 0.50 per cent to 0.80 per cent. While they are considered expensive by some, others look at it as a lucrative long-term option.

What are the risks to consider?

While the risks are many, over-reliance on equity investments is one of the biggest. Equity markets face volatility due to market events, which in turn could impact the performance of the fund.

How do trusts hedge currency risks?

Since funds in this sector invest across the world, they face currency risk. But fund managers hedge against exchange rate fluctuations using instruments like forward contracts and options.