Many private investors may have only become familiar with them in recent years, but investment trusts are no flash in the portfolio pan. Although their profile has climbed steadily of late as they have become more widely accessible via online investment platforms, investment trusts date back to the heyday of the Victorian era.
Of the 350-plus members of the Association of Investment Companies (AIC), 25 are over 100 years old and 17 were launched before the turn of the 20th century; so although times may have been difficult in the past few years, these investment trusts really have seen it all before. The oldest have survived – and over the longer term thrived – through two world wars, the Spanish flu pandemic, the Great Depression and the global financial crisis, among numerous other catastrophes.
In fact, the very first investment trust predated radio, lightbulbs and cars, launching in 1868 in a world of telegraphic cables, steamships and railways. It had the stated aim of providing “the investor of moderate means the same advantage as the large capitalist in diminishing by spreading the investment over a number of stocks”.
The early trusts were largely focused on bonds and other fixed interest investments, primarily issued in America, Australasia, Latin America and other emerging markets of the day, where opportunities were plentiful and interest rates more attractive than in the UK. It was only in the 1920s that there was a gradual shift away from fixed interest holdings and into equities.
They tended to specialise in specific areas of expansion: US railroads, land mortgages for pioneer farmers, shipping, trading businesses or overlooked investment niches. Innovation and enterprise have always been a hallmark of the investment trust sector.
Although the very first investment trust was a product of the City of London, Scotland was an equally important hotbed for these early financial innovators. A clutch of market-leading investment trusts emerged out of Dundee, which in the 19th century was a booming engineering and industrial hub. One of the very oldest trusts, Dunedin Income Growth Investment Trust, has its roots there, having launched 150 years ago as Scottish American with a focus on American railroad bonds.
Edinburgh and Glasgow were also both home to a number of illustrious trust families: for example, Murray Income Trust celebrates its centenary this year, having started life in Glasgow in 1923 as Scottish Western Investment Trust, with a mandate to invest in the growth industries of the time.
Those early funds may sound very different from 21st-century counterparts, with their focus on what today might well be considered “old-fashioned” or eclectic parts of the market – a far cry from the technology, healthcare or renewable energy sectors – and their preference for loan stock over equity holdings.
Nonetheless, as listed companies they shared many of the same features that set today’s investment trusts apart from the competition. For a start, they were actively managed, long-term investments, designed to provide access to a basket of interesting opportunities for private investors.
As companies listed on the stock exchange, they were allowed to borrow or “gear” to invest and enhance returns. Gearing grew in popularity in the 1920s, fueled by growing interest in trusts and the booming economy of that decade. It certainly worked for Murray Income, which was highly geared, borrowing at 3% and investing in fixed income securities paying 5%.
The corporate structure of investment trusts also entailed the appointment of an independent board of directors, acting in the interests of shareholders and overseeing the fund manager’s role. That’s an aspect of the sector that has arguably come under greater scrutiny recently, as the retail shareholder base has broadened and trusts’ wider regulatory obligations have increased.
For David Barron, chairman of Dunedin Income Growth, the role of the board is all about shareholder outcomes. Its most important jobs, he says, include “ensuring that the mandate remains differentiated, relevant and delivered at an appropriate cost, and working closely with the investment managers at abrdn to get the very best outcomes for shareholders.”
At Murray Income, chairman Neil Rogan says that beyond the investment review at every meeting, “governance and strategy are the two elements that take up most board time”. He adds that a current focus is on Murray Income’s policy of positive ESG change, and big questions around whether to exclude certain types of company from the portfolio or to engage with them to change their practices for the better.
Such discussions highlight the guiding hand of investment trust boards, steering companies in terms of performance, risk management and good governance. It is also clear that the longevity and success of investment trusts through 150 years of unprecedented change is a reflection of their willingness to move with the times, as investors’ needs have evolved.
One prime example of that over recent years has been the hunt for continual and growing income, as private investors have squared up to the need to make provision for a retirement that could last several decades. Here again, investment trusts have come into their own, helped by the opening up of online investment platforms that have made them so much more easily accessible for ordinary investors.
The ability of investment trusts, as listed investments, to retain some dividend income and build up revenue reserves that they can draw on in leaner years makes them a more reliable choice for income-seekers than open-ended funds, which are obliged to pay out all their income.
Indeed, the AIC’s ongoing ‘Dividend Hero’ campaign has helped highlight the growing number of trusts that are prioritising year-on-year dividend growth as part of their investment strategy. Eighteen dividend hero trusts have increased their payouts for at least 20 years, and eight of those have achieved more than 50 consecutive years of dividend growth.
Murray Income expects to be welcomed to the 50-year hallowed ranks later in 2023. “It is literally our objective to provide a high and growing income, combined with capital growth,” explains Rogan.
Dunedin Income Growth, with 10 years of dividend growth under its belt, is a newly qualified ‘next generation’ dividend hero; but as Barron points out, maintaining that record is a key consideration: “The board reviews abrdn’s assessment of the dividend-paying ability and the resilience of that dividend at each board meeting.”
The importance of staying relevant to modern life extends beyond income considerations, however. It’s an area where Dunedin Income Growth has had plenty of practice over the decades. “In its early years Dunedin Income Growth offered professional management and access to a portfolio of US bonds, principally fixed income securities issued by railroads. As investors increasingly sought growth and growth of income through the middle years of the last century, the trust reacted to focus much more on equity investment,” Barron explains.
More recently, it has broadened its mandate to non-UK equities to give greater scope to diversify the sources of income in the wake of BP’s dividend cut in 2010 following the Deepwater Horizon oil spill. Barron adds: “The ESG focus was an evolution of this strategy, which had moved away from simply focusing on high yield to an approach that focused on dividend growth and sustainability of the dividend.”
Cost reduction is another area of current focus for the industry, especially in the face of increased competition from other collective investments such as open-ended funds and exchange traded funds. Indeed, it’s been an important factor behind recent trust takeovers and mergers, as Rogan observes.
“We seek a gradual reduction of ongoing charges over time, but the 2020 merger with Perpetual Income & Growth Investment Trust gave us the opportunity to make a step change down to the current 0.50%. We were able to deliver about 10 years’ worth of savings in one go”, he says.
This heritage of adaptability is a reassuring underpinning to the robust structure and long-term outperformance of investment trusts. It’s good to remember how capable they are of evolving to meet investor needs in an ever-changing world.
Find out more at dunedinincomegrowth.co.uk and murray-income.co.uk