The Big Picture: Final thoughts on investment options

In his final Big Picture column, David Stevenson considers the next steps for investors deploying capital into investment trusts. As discussed last week, diversifying US equity exposure is key. Now may be the time to focus on income-generating funds, with our model income portfolio offering further ideas. Equity income funds could also play a significant role in a balanced strategy.

By David Stevenson

This is our last Big Picture column, and it might be worth ending with some practical ideas for investors in investment trusts. My advice is to keep it simple and not be swayed too much by the fashionable ideas kicking around the investment commentariat. Stick to monthly pound cost averaging into your favourite diversified equity and bond funds, and generate the wealth that funds these regular plans. Frankly, the best idea for most investors I talk to is to build a core portfolio with the broadest exposure to the widest range of financial assets (equities, bonds and other structures), keep costs to a minimum and then just forget about it. 

But I’m also aware that many investors have more idiosyncratic, short-term objectives: they might have a large capital sum to invest or be older and more worried about equity market volatility. Alternatively, they might need more income for retirement. In these circumstances, the idea of finding a very diversified fund, such as the Alliance Witan Trust or a broad MSCI World ETF, and then sticking with it doesn’t quite work. These investors are forced to take a view, so I’d offer the following three observations.

The first echoes last week’s article: diversify and ensure you are not overly exposed to US tech stocks. This is not to say that US tech stocks aren’t an excellent investment – they have been and may continue to be. It’s just that most globally diversified equity funds, be they active investment trusts or passive index trackers, have a very high exposure to a handful of tech names, notably the Mag7.  In the very broad MSCI World index, for instance, these seven stocks plus another tech giant called Broadcom currently account for over 24% of the value of the index – and that’s for an index that has 1396 stocks and currently comprises just under 75% of its market value in US equities. 

What might the alternatives be? The first area worth exploring is to shift some of your focus away from US tech stocks and think about having a bit more exposure to equity income funds: the UK investment trust market has lots of these funds out there at the moment, and I’d probably focus most attention on globally diversified equity income trusts. You’re spoilt for choice in this space, but I’d probably highlight JPMorgan’s very successful Global Growth and Income fund, yielding 3.7%, and Murray International, yielding 4.3%.

The next area worth exploring is to think local: I argue that the UK economy is slowly on the mend. Although there are some headwinds, the UK market is cheap, still produces decent earnings growth and contains pockets of enormous value. I prefer to overweight UK small-cap stocks, which, although volatile, do present huge opportunities. If that strikes the reader as too risky, I’d consider investigating UK equity income as a sweet spot, with funds like Law Debenture and City of London Investment Trust topping the list.

Next, I’d point to our model Income portfolio as a source of great income stories. It’s packed with a combination of global and alternative income trusts such as BioPharma Credit or TwentyFour Monthly Income, TFIF. This model also includes one of the few bond investment trusts in the UK market, Invesco Bond Income Plus, which currently offers a dividend income of 7.1% and trades at a small premium of 0.6%.

Sticking with the theme of UK equities, I’ll finish with one last thought: cheap alternative income funds. Last week brought the news of the first fund IPO for nearly two years: the Achilles Investment Company, which raised just over £50m to shake up the alternative funds segment. I think it’s an excellent idea, although it will have its work cut out, finding the right funds to target and change. The successful launch nevertheless underscores a considerable opportunity set: many funds are trading at huge discounts that are still churning out decent yields, but the market has chosen to undervalue. Something needs to give, and Achilles might be the catalyst that makes investors rethink their exposure to the space. As James Carthew over at Citywire points out, the team behind Achilles “cites a £39bn valuation gap between market caps and asset values in these [alternative assets] sectors. It will seek to ‘maximise value for shareholders through constructive activism’”. This isn’t Saba but more an assertive, constructive catalyst to get share prices moving in the right direction. Its timing is spot on, and I think investors might want to look at the funds Achilles might target carefully.