For most people, freedom from the need to earn a living shouldn’t mean having to pore over a computer screen every day, worrying about investments. Rather, it should be a time to enjoy a secure income that grows at least as fast as the cost of living, with minimal effort. That way, precious time can be spent travelling, pursuing hobbies and experiencing the company of friends and family.
Investment trusts are a great way to fund such a lifestyle. They’re publicly traded companies, listed on the London Stock Exchange, that specialise in buying shares in other companies. Unlike Unit Trusts and Exchange Traded Funds, they can hold dividend income in reserve in good times, potentially enabling them to maintain payouts if things get tough. Many hold more than a year’s income in reserve, which is reassuring. They can also borrow, which boosts returns when things go well (though it can also accentuate the impact of downturns on the share price). What’s more, an investment trust’s share price reflects market sentiment and not just the underlying value of its assets. So there are times when they trade at discounts. Combine this with the effect of gearing, and it’s clear that well-timed purchases can boost returns.
Here are three I think make great buys right now:
Perpetual Income & Growth
A classic case of a great investment trust going cheap right now, Perpetual Income & Growth Investment Trust (LSE: PLI) has underperformed the FTSE 100 in the past year because its manager, Mark Barnett, has made a conscious decision to be underweight in capital-intensive and volatile commodity and energy stocks, which feature prominently among the UK’s largest firms. What’s more, its discount to Net Asset Value (NAV — the worth of its underlying holdings) stands above 8%. With biases toward healthcare, consumer goods and financials, Barnett selects firms that are able to increase their dividends faster than inflation, achieving a 125% rise in payouts between 2007 and 2016 and holding eight months’ dividends in reserve.
Finsbury Growth & Income Trust
A conviction-driven fund, Finsbury Growth & Income Trust (LSE: FGT) typically backs no more than 25 companies, holding them for many years and buying on the dips. Manager Nick Train focuses on businesses with what Warren Buffett calls ‘wide moats’ — intellectual property such as brands, technology or network effects that insulate them from competition. In recent months market sentiment has turned bearish on some of these holdings, resulting in the trust’s share price merely matching, rather than outperforming, the FTSE 100. At 2.01%, the yield is low, but it grows at typically 7.5-8% a year, while the 10-year annualised share price return, at 10.61% , makes it a great choice for those still working or in early retirement who seek returns biased toward capital growth.
Princess Private Equity
Combining a generous 6.19% yield with attractive capital growth (above 19% a year between 2014 and 2016), Princess Private Equity Holding (LSE: PEY) is a different beast to my other recommendations, since it invests in unlisted companies. Managed by global private equity firm Partners Group, the Guernsey-domiciled trust deploys half its capital in Europe, a third in the US and the rest in Asia and elsewhere, across a mix of sectors and situations (buy-outs, growth investments, turnarounds and debt). Traded in Euros, the sterling price is influenced by the exchange rate, which has regained around half its post-Brexit losses. The valuation techniques used for the unlisted investments are cautious, with most realisations exceeding carrying values.
