A lot of people starting out in investment are a bit scared by the possibility of losing money if their shares fall, and that’s a serious concern.
Once you have a broad portfolio and you’re already sitting on long-term profits, handling short-term falls becomes second nature. But if you’ve only built up one or two stocks, a downturn can be very discouraging.
That’s one of the reasons I like investment trusts, as they effectively pool shareholders’ money across a wider range of investments, and that can lead to reduced volatility.
I don’t hold any investment trusts now, but I have done in the past, and I have several on my watchlist. Here are two.
Big discount
One is Caledonia Investments (LSE: CLDN), which I gave a nod to back in October. The trust has a widely diversified portfolio, but its speciality is uncovering and buying up smaller companies with growth potential — and it’s been doing pretty well at it.
It’s global in its outlook too, so I also see Brexit defence characteristics there.
Caledonia shares have done well since I last looked at them. While the FTSE 100 carried on sliding throughout the final quarter of 2018, the investment trust went in the opposite direction.
As a result, over the past 12 months the shares have gained 9% while the FTSE 100 has lost 1% — and the trust is up 53% compared to just 8% for the index over five years. Dividends work the other way, with Caledonia’s 2.2% yield in 2018 about half the FTSE’s — but it’s still a significant overall winner.
Net Asset Value (NAV) per share stood at 3,441p at 31 December, and with a current price of 2,999p the shares are trading at a discount of 13%. I think that’s a bargain.
Better record
My colleague Peter Stephens sees Alliance Trust (LSE: ATST) as an attractive candidate for a starter portfolio, and I agree.
Alliance Trust refocused its investment approach in 2017, and it’s perhaps a little early to tell how that’s likely to work out. But we’re looking at an even better five-year performance than Caledonia Investments, with a rise of 65% — and dividend yields have been similar at around 2%.
Unsurprisingly, shares of a trust with that recent performance are closer to its NAV per share, but they’re still trading at a discount of 5%. That means investors value the company as a whole at 5% less than the assets it owns, and I see another undervaluation here.
Although dividend yields are not great, the trust’s progressive policy should see the actual cash rising ahead of inflation — and over a couple of decades, that can work wonders for your income levels.
Again, Alliance Trust invests globally, and that carries the same relative lack of exposure to Brexit worries in the UK. And I think diversification is important in the early days of your portfolio generally, as it provides a bit of a buffer against local shocks.
I like both
At my stage of investment I don’t really need that single-stock diversification, but I’m looking at these trusts from a different perspective. Although I’m mainly a dividend investor these days, it’s not 100%, and I’m seriously considering the two of them for the more modest growth portion of my portfolio.
