Morningstar View: Learning how to adapt

This year, five investment trusts are celebrating their 125th birthday: British Empire, F&C Global Smaller Companies, Merchants, Edinburgh Investment Trust and Law Debenture.

A handful of their peers are even older – Foreign & Colonial Investment Trust was already 21 years old when these trusts were born.

So why is it that these trusts have enjoyed such longevity and age better than some peers? One answer lies in their ability to adapt to the current investing environment.

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Foreign & Colonial Investment Trust, which launched in 1868, had a different look when it started, with investments comprised primarily of government bonds. But as opportunities changed and stockmarkets evolved, so did the fund, and in 1925, the fund started to invest in equities. In marked contrast to its holdings at launch, today that fund has less than 1 per cent invested in bonds.

This change in strategy can be driven by the asset management firm that’s been appointed as the investment manager, or by a proactive and engaged independent board. The difference between the two approaches within the different fund structures is stark, but they both demonstrate funds that recognise market change and evolve to adjust.

Take a recent example in North American Income Trust, until 2012 known as Edinburgh US Tracker. While relatively cheap for an investment trust, the fund was an expensive tracker fund that generally underperformed its benchmark. Given the proliferation of exchange-traded products that can track an index more efficiently and more cheaply, in a time where technology has driven costs down and efficiency up, that tracker simply didn’t cut the mustard any more. The board and Aberdeen Asset Management approached shareholders with their proposals: to have the fund managed in an active way and to introduce a bias to income. That means they can make full use of the revenue reserve account and the benefits it brings, and create a product that’s relevant for today’s investors.

Contrast that with a fund that will be moving into the Aberdeen stable through corporate activity – Scottish Widows UK Tracker – whose performance has been erratic when compared with the FTSE 100 index: sometimes outperforming it in a year, sometimes underperforming, yet that fund comprises some £211m of investors’ assets.

Inertia means that the fund still exists. So rather than a fund fall out of vogue, or be a serial underperformer that relies on sticky assets, a trust can give itself a face-lift, or even a whole new appearance.

That’s not to say that we think funds should keep reinventing themselves. Take Merchants Trust, which celebrated its 125th birthday in February. At launch, the fund’s aim was to give shareholders a diversified portfolio of equities and that aim is still intact today.

Manager Simon Gergel may do this in a different way from his predecessors, but the nature of the fund and its focus on income growth as well as capital growth through a portfolio of equity investments is largely unchanged.