I love investment trusts. They provide a nice bit of diversification in just a single investment. And I get to own shares in the company directly, so the managers face no conflict of interest.
Is there a simple way to narrow the choice down to just five options? One that really doesn’t need too much brain power? Here’s something I’ve come up with.
I started with the Association of Investment Companies (AIC), and their Dividend Heroes list. It’s the set of UK investment trusts that have raised their dividends every year for 20 or more years in a row.
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I like that, even for trusts that don’t aim to pay big dividends. It just shows consistency. And I think it suggests conservative management.
Five investment trusts
Next, I went down the rankings and picked the first one from each difference AIC-designated sector, until I had five. The sectors overlap a bit, but checking the top 10 holdings of each trust I still see quite a bit of variation.
These are the five investment trusts I ended up with:
| Investment trust | Sector | Dividend raises (years) | Dividend yield | 1-yr Share price growth | 5-yr Share price growth | Discount/ premium |
| City of London Investment Trust | UK Equity Income | 55 | 4.6% | 7.3% | -2.3% | +1.9% |
| Bankers Investment Trust | Global | 55 | 2.1% | -9.3% | 32% | -6.9% |
| Caledonia Investments | Flexible Investment | 55 | 1.7% | 23% | 32% | -25% |
| BMO Global Smaller Companies | Global Smaller Companies | 51 | 1.2% | -8.3% | 14% | -12% |
| Scottish American | Global Equity Income | 48 | 2.6% | -0.8% | 38% | -3.0% |
It throws up some intriguing options for further research.
Big discount
Caledonian Investments jumps out at me. The dividends are nothing special. But look at that share price growth. Most striking is its discount to net asset value, a whopping 25%. Each share costs a full 25% less than its underlying assets.
The trust invests fairly heavily in unlisted investment companies, so maybe that’s making investors wary. After all, it was betting heavily on illiquid unquoted investments that brought down Neil Woodford.
Caledonia does hold shares in three big US blue chips, Microsoft, Watsco, and Oracle. But they only make up around 2% of its funds apiece. I’ll definitely dig into this one further.
Growing shortlist
Bankers Investment Trust has been on my shortlist for some time. It’s been a little volatile in the short term, and doesn’t pay a big dividend. But long-term growth looks good. And I do like that tempting 6.9% discount.
Finally, I’m drawn to BMO Global Smaller Companies. It has a rare speciality, which is hard for investors to get into on an individual stocks basis. It’s going to carry risk, but the diversification plus the big discount will surely help offset that.
Buy them all?
I can’t help thinking that buying all five of these investment trusts and holding for a decade or two could produce some very nice returns. But I’m more likely to use it as a starting point for further research, as there could be individual opportunities and risks here that I’d want to uncover.
