I know a young person who’s planning to invest in a Stocks & Shares ISA for the first time in 2021, and he’s likely to start with an investment trust.
Risk can be a big problem when we’re starting out investing, and a bit of early diversification help can offset this. For this reason, I think an index tracker fund can be a great way to start.
But we can also get diversification from an investment trust, especially one that spreads some of its cash across big FTSE 100 companies.
City of London Investment Trust, which I hold, does that. It focuses on progressive dividends. And it’s so good at it, it’s managed to raise its annual payout for 54 years in a row. That puts it in joint first place in the Dividend Heroes list, compiled by the Association of Investment companies.
The list includes all those investment companies that have increased their dividends for at least 20 years in a row. The top six have achieved this for 50 years or more, so I thought I’d check how they compare to the FTSE 100.
Investment trusts performance
I checked on their 20-year growth rate, their runs of dividend raises, and current dividend yields…
| Trust/Index | Dividend run (years) |
20-year growth | Current yield |
| FTSE 100 | 0 | 17% | 3.8% |
| City of London Inv Trust (CTY) | 54 | 56% | 4.9% |
| Bankers Inv Trust (BNKR) | 54 | 256% | 1.9% |
| Alliance Trust (ATST) | 54 | 196% | 1.5% |
| Caledonia Investments (CLDN) | 53 | 111% | 2.1% |
| BMO Global Smaller Companies (BGSC) | 50 | 584% | 1.0% |
| F&C Investment Trust (FCIT) | 50 | 225% | 1.4% |
Before I go any further, I must offer the usual disclaimer. Past performance is not an indicator of future results. If every investment always kept on repeating its past performance, investing would be a no-brainer. But they don’t, and the way these trusts have outperformed the FTSE 100 over 20 years might not repeat over the next 20. We have, I need to keep reminding myself, been through an unusually tough two decades for the Footsie.
Although these investment trusts have all raised their dividends for more than 50 years, most of the yields are relatively low. But just look at some of those growth figures. Even City of London, which invests for income, has outperformed the index more than threefold, in growth terms. And how about BMO Global Smaller Companies? A gain of 584% over the past 20 years is pretty impressive.
Diversified expertise
Caution again though. Investing in smaller global companies has got to be one of the riskier strategies out there. And I wouldn’t bet on seeing the same performance over the next 20 years. Still, I’m thinking about the potential in that strategy. Given that I have no clue about buying companies like that directly, investing in this trust would be far less risky for me than trying to do it myself. I have it on my 2020 ISA candidates list.
Looking at just these six investment trusts, I’m seeing a pretty big helping of diversification. City of London is UK-focused, Caledonia is flexible, and the others are global. And BGSC, of course, concentrates on smaller companies.
It looks to me like these investment trusts, taken together, could offer more diversification than the FTSE 100. I think a chunk of my 2021 ISA investment cash will go into some of these trusts.
