Investments  

Russell Taylor: Investment trusts as a play on Brexit

Russell Taylor: Investment trusts as a play on Brexit

The anti-Brexit portfolio seems to be holding its own, despite the increasing fears that world growth is stuttering. 

Optimists can make a case for the UK, too. Public finances are sound, employment is high, consumer demand is solid enough and tax receipts (especially VAT) are buoyant.

Economists v politicians

The country’s principal economic forecasters, from the Office for Budget Responsibility to the Bank of England, are all convinced that Brexit will seriously affect the country’s future growth and economic prosperity. But no one really believes these gloomy predictions, and certainly not politicians. The sun is still shining, the rain clouds are far away, and the roof seems watertight.

In the meantime, the questions of Brexit are enmeshed in abstruse questions of parliamentary procedures, of interest only to constitutional lawyers, and the complaints of business people have yet to lead to wide-scale redundancies, or empty supermarket shelves. 

At the time of writing, we know that UK law means the UK will leave the EU within just a few days on April 12, but again no one believes that will actually happen. Some form of words will magically pop up to delay decisions yet again.

The bull run goes on

In stock markets, the band plays on. However fearful some investors may feel, this 10-year-old bull market is still running. Over the past three months, the MSCI is up by 7.7 per cent and the FTSE by 9.4 per cent, while the anti-Brexit portfolio I have discussed in recent months has increased in value by 10.2 per cent (see Table 1). 

Table 1: Anti-Brexit portfolio update

Investment company

Initial investment as at end-December (£)

YTD share price total return, to end-March (%)

Dividends per share paid, to end-March

Yield (%)

Witan

25,000

8.9

0

2.5

Alliance Trust

25,000

9.9

3.389

1.8

Personal Assets

15,000

4.3

140

1.4

Scottish Mortgage

15,000

11.8

0

0.6

Worldwide Healthcare

10,000

15.3

0

0.6

Polar Capital Technology

10,000

15.6

0

0

Total portfolio performance

100,000

10.2

1.44

FTSE All-Share

n/a

9.4

n/a

n/a

MSCI World index

n/a

7.7

n/a

n/a

Source: AIC/Morningstar. Copyright: Money Management

This portfolio has some advantages compared with the indices. The income yield based on quarterly dividends alone is 1.66 per cent, while two of the companies in the portfolio are ‘dividend heroes’ of the Association of Investment Companies and are expected to increase dividends substantially this year. The portfolio’s yield compares with annual yields of 2.21 per cent for the MSCI and 4.22 per cent for the FTSE.

These are some of the advantages of investment trusts for private investors. Most are focused on specific markets or sectors but are formed under company law, so that the investment manager knows, from day to day, the amount of funds that he has to manage. 

This is a much simpler task than that of the open-ended fund manager, subject to regular inflows and outflows. Such strategies, whether Oeics or unit trusts can be forced to liquidate strategically valued holdings if market panics affect their investors. But the only way out of an investment company is to sell the shares in the market.

Protecting the downside

Another valuable right for trusts is the ability to keep back earlier-year profits as company reserves. These profits can then be mobilised as extra cash for dividends in bad years – and stable dividend income is something that nearly all investors should crave.