I often meet people who want to get an ISA started and know I’m a big supporter of investing in shares. But they either don’t feel confident enough to pick their first stocks, or they’re uncomfortable with the early risks of having poor diversification.
They like the relative safety of buying into managed funds, but don’t like the typical poor performance, or high charges.
For those reasons, I think going for investment trusts is a great way to start. In fact, I still like investment trusts even with my lengthy experience of choosing my own shares.
An investment trust still gives you exposure to a diversified set of holdings, but it differs from typical managed funds in one key way. Rather than handing over your cash to a company to be managed (with managers’ first loyalty being towards their shareholders and not you), with an investment trust, you buy shares in the company itself.
There’s then no conflict of interest, as the owners of the cash are also the company’s shareholders — it’s almost a kind of a mutually-managed fund.
Which ones?
Caledonia Investments remains one of my favourites, with its target of beating the FTSE All-Share index over the long term while providing progressive dividends. With a net asset value (NAV) per share of 3,441p at 31 December, Caledonia shares, at 2,940p, are currently trading at a discount of 14.5%.
It’s possible the trust’s specialism of looking for undervalued smaller companies is out of favour in the current risky economic climate, but I remain convinced the shares are a bargain.
One of the most popular among investors these days is Lindsell Train Inv Trust, which puts its money into a wide range of assets. The trust has performed brilliantly, but at 31 January, its shares were priced at a massive premium to NAV of 57%.
To buy the shares, you’d have to pay half as much again as the value of the underlying assets, and I see that as just too expensive.
Wide variety
City of London Investment Group is an intriguing one. Specialising in emerging markets, the trust has seen its funds under management slipping as we get into 2019.
But with plenty of cash on its books, it announced a special dividend in February. Analysts are subsequently forecasting a yield of 8.1% this year, which would drop back to 6.9% on 2020 forecasts. But there’s not much cover by earnings, so are payments at that level sustainable? My colleague Kevin Godbold thinks so.
A subsection of the sector, real estate investment trusts (REITs), provides pooled exposure to the property market without the risk of getting and paying your own mortgage, finding tenants, etc. And with the bears talking property down these days, coupled with weak retail sentiment, I think there are some bargains in commercial property trusts.
An example is Hammerson, which invests in and develops shopping centres, retail parks and offices. With the share price down 40% in the past 12 months to 339p, we’re looking at a discount to 2018 year-end NAV of more than 50%. Even if book values of some properties might be destined to be written down a little in the coming year or two, that still looks like a bargain valuation to me.
