10 Core Investments for your ISA

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In the aftermath of the referendum on whether to stay in the EU, investors are faced with a host of uncertainties – not only around the realities of Brexit but also, a little further down the line, over other international concerns – from the state of the Chinese economy to the US presidential elections in November. Further ahead still is a trench of European elections.

This selection of investment trusts is in the main a conservative one, focusing on diversity and on steady, dependable trusts with high quality managers and an element of income. But though most of the choices are relatively defensive, it also includes some slightly more adventurous options with more concentrated portfolios.

One or two – for example, Foreign & Colonial or Edinburgh investment trust – could be used by starting investors looking for a single broad-based core holding. But most of the others would sit better in a small portfolio of holdings for greater overall balance.

We hope you find some useful ideas among them. Performance figures come from Morningstar and are to 1 July.

 

1. Foreign & Colonial (Global sector)

This £2.4 billion generalist equity- focused investment trust dates back to 1868, but has reinvented itselt particularly over the past couple of years under manager Paul Niven. It outsources much of its portfolio to external specialist funds or managers, while looking after other areas in- house.

It focuses on a mix of well-established companies listed on major exchanges plus the rising stars of emerging markets such as China and Latin America, and also holds about 10% in lucrative (but less easy to sell) unlisted companies. More than a third of the portfolio is invested in small cap companies, so it is highly diversified in every respect. It has also increased dividends every year for 45 years.

2. Scottish Mortgage (Global sector)

This £3.4bn high-octane, high- conviction investment trust, run by Baillie Gifford, has been managed since 2000 by James Anderson. It holds around 70 stocks, but the top 10 account for more than half of total assets. Anderson’s current global themes include the speed of technological advances and how they can disrupt established business practices, and the re-emergence of China as an economic superpower. The trust can also hold up to 25% in unquoted companies; currently unlisted companies account for around 15% of assets. A further attraction is the trust’s low cost, at 0.5%. Scottish Mortgage has an outstanding three- and five-year record, but can be volatile in the short term.

3. Murray International (Global equity income sector)

Manager Bruce Stout of Aberdeen Asset Managers is a contrarian who aims to pick quality companies at low prices. He is highly regarded by analysts, but has has had a difficult few years of underperformance. However, the trust’s fortunes have picked up dramatically this year, helped by its 25% exposure to emerging markets (which have seen a turnaround) and underweight position in the UK and sterling. He has recently been defensively positioned – a tactic that is likely to pay off in the current climate of uncertainty, according to broker Winterflood. The current discount of around 5% represents a good opportunity to pick up a high-quality trust with an attractive 4.5% yield.

4. Troy Income & Growth (UK equity income sector)

Troy Income & Growth aims to provide both a decent and growing income (currently it’s yielding 3.15%) and capital uplift, while protecting investors against the full impact of painful falls. It does this through a focus on defensive, dividend-paying larger and mid-cap British companies. It’s a relatively concentrated portfolio of some 45 holdings, around two thirds of which are in the FTSE100 and just 20% in the FTSE 250; financials, consumer goods and utilities account for almost 60% of the portfolio. The trust rarely uses gearing (borrowing) and operates a zero discount policy, making it a less risky option than many of its peers – despite which it has provided consistently strong performance under manager Francis Brooke.

5. Edinburgh investment trust (UK equity income sector)

Manager Mark Barnett of Invesco Perpetual has an enviable record as a safe pair of hands, notwithstanding the huge amount of money he manages in total. This £1.3 billion trust is a substantial one, but since he took the reins in early 2014 it has been consistently top quartile. It invests in a mix of blue chips (around 55%) and FTSE 250 stocks, with about 15% in overseas holdings. It currently yields 3.5%, but prioritises dividend growth over immediate yield. The ongoing charges figure (OCF) is competitive at 0.61%.

6. Henderson Smaller Companies (UK smaller companies sector)

Although it has an enviable long-term record, with the share price up 100% over five years compared to a sector average of 57%, and also provides a higher yield (currently 2.5%) than most trusts in the sector, Henderson Smaller Companies has had a tough year compared with its sector. That was because manager Neil Hermon focuses on high-quality, well-financed growth companies, which meant he was not holding the mining stocks that have seen such a strong bounce in 2016. However, this focus on quality does make the trust an attractive post-Brexit choice, especially on a 17% discount.

7. Personal Assets (Flexible investment sector)

This self-managed trust was picked by broker Winterflood as a good choice in the event of a Brexit, as it offers exposure to a range of assets including gold (11% as at the end of June) and index-linked bonds as well as international equities, primarily North American. The risk of discount volatility is further reduced through its zero discount policy, which means the trust uses share buybacks and issuances to keep the share price close to net asset value. It therefore acts as a useful balance within a wider portfolio; however, its focus on capital preservation does mean performance tends to look pretty lacklustre when the markets are roaring ahead.

8. North American Income (North America sector)

This Aberdeen trust started life as a S&P500 tracker, but went over to active management in 2012. It aims to provide investors with an above-average dividend income, paid quarterly, and long-term capital growth from a portfolio of shares predominantly chosen from the S&P3 500 index. The managers, Ralph Bassett and Fran Radano, look for high-quality dividend growers with an average yield of 1.5 times the index, and especially businesses with the ability to generate increasing levels of cash flow from one business cycle to the next. Winterflood tipped the trust in its post-Brexit update: ‘We believe [it] offers defensive exposure, an attractive yield (currently 3.3%) and value at its current discount of 12%,’ says the broker.

9. Templeton Emerging Markets (Global emerging markets sector)

Templeton Emerging Markets, with assets under management of £1.5bn, is by far the largest and best known trust in the sector, but for years it has lagged its peer group. New manager Carlos Hardenberg took over from the longstanding Mark Mobius in October 2015, and has increased diversification, almost doubling the number of holdings. The trust takes a long-term, value-oriented approach, and over the first half of 2016 its net asset value performance was the best in the sector, up an impressive 34% against the sector average of 24% as investors have finally returned to emerging markets. The share buyback scheme provides additional protection from the risk of widening discounts.

10. Pantheon International (Private equity sector)

In the interests of diversification unlisted company returns are not tightly correlated to the volatility of the quoted market – and to boost returns, experts such as Simon Elliott at Winterflood are recommending a private equity holding. Pantheon International, the first fund of PE funds to be set up in the UK back in the 1980s, is highly regarded and provided ‘very well managed, highly diversified exposure,’ says Elliott. It has no gearing, plenty of cash, and competitive charges for this type of fund. Moreover, in the aftermath of the EU referendum, despite net asset value gains of over 6% in the month to mid July, it is trading on a discount of around 25%.

 

 

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