The whole investment trust space seems to be going through a resurgence in popularity.

In 2017 independent financial advisers (IFAs) bought a record £990m of investment trusts through their favourite platforms, according to statistics provided by the Association of Investment Companies (AIC).

That’s a 46% jump on the £679m ploughed into investment companies in 2016, and 41% up on the previous high of £704m in 2015.

This is a stark change for a sub-sector of the stock market that has for years struggled with an image problem that had seen investment trusts ignored by many IFAs, wealth managers and DIY investors. Perhaps the penny is finally dropping.

About time too because investment trusts can provide instant portfolio diversification across a range of companies, industries and geographic regions at a stroke.

Also known as close-ended funds, they are listed on the London stock market which makes them easy to buy (and sell), and are risk managed by expert fund managers.

Traditional funds split their assets into units, and as investor demand for a fund rises it issues more units. That’s why they are called open-ended funds, because the number of units is not fixed.

Investment trusts work a bit differently. Like normal equities, they have a set number of shares in issue (although new shares can be issued and existing stock bought back as circumstances change), and the price of those shares rises and falls in line with buying and selling behaviour.

INVESTOR FAVOURITES

Not all investment trusts are equal, in the eyes of investors, with some much more popular than others. But why?

The obvious answer is share price performance, the ultimate arbiter. This makes perfect sense since the whole point of investment is to have more asset wealth in the future than you have today.

No exit penalties and consistently rising dividends are other pluses for many investment trusts, while the width of discounts or premiums to net assets and the level of ongoing charges are also likely to form part of an investor’s selection criteria.

A long track record of performance and the perceived quality of the managers running the show are other important factors, points out James Budden, director of retail marketing & distribution at Baillie Gifford, which runs the Scottish Mortgage (SMT) investment trust.

Scottish Mortgage stands out. Run by respected manager James Anderson for the best part of two decades (with help from capable deputy Tom Slater), it is the most popular investment trust with retail investors using the AJ Bell platform, as the table shows.

That may be too small a sample size to draw firm conclusions on its own, but any claim that Scottish Mortgage is the UK’s favourite investment trust is more powerful when you consider that it also heads popularity lists of other platforms too, such as Hargreaves Lansdown, Barclays and Interactive Investor, for example.

The same goes for Finsbury Growth & Income (FGT), City of London (CTY) and RIT Capital Partners (RCP), which sit on multi-platform popularity lists.

GROWTH NOT TECHNOLOGY

So what is the Scottish Mortgage secret sauce? Big stakes in some of the most exciting mega-cap growth companies helps. The trust has 9.9% of its funds invested in online retail giant Amazon, for example, whose shares have risen five-fold in five years.

There are decent stakes in Netflix, genome testing kit
maker Illunima, and two of China’s internet stars, Tencent and Alibaba.

So big of technology? No, says James Budden, who rejects claims that Scottish Mortgage is a tech trust. We are looking for ‘blue sky growth,’ he says, aiming to buy the ‘best growth companies in the world for the next five or 10 years,’ he says.

He also argues the point that Amazon is at its heart a retail business that very effectively is using the internet and other technologies to sell its wares.

The great thing about
internet-based businesses is that they can ‘scale-up with little capital needed’, the Baillie Gifford man says.

‘Facebook and Google are basically advertising businesses,’ that’s certainly where the vast majority of revenue and profits come from, while car makers Tesla and Ferrari feature
among Scottish Mortgage’s
top 10 holdings.

‘Sure, they use and develop technology to make their cars smarter, safer, more efficient and more desirable but they remain automotive firms, says Budden.

BLUE SKY THINKING

Investing in emerging stars of tomorrow is clearly popular with retail investors. That is just the strategy of Neil Woodford’s Woodford Patient Capital Trust (WPCT), still a firm favourite with investors even though its share price performance continues to stink up the stock market.

This explains the yawning 12.6% discount to net assets versus the 2.3% premium on which Scottish Mortgage trades.

Presumably, Woodford Patient Capital’s continuing popularity
is down to the previously pristine, albeit now more blemished, reputation of Neil Woodford himself.

Online estate agent Purplebricks (PURP:AIM) is probably one of the trust’s
only major holdings that most people will know. But Woodford and investors will be hoping it doesn’t stay that way.

There is certainly plenty of exciting potential around BenevolentAI’s biotech research database internet bank Atom Bank and the cancer treatment technology of Autolus, the trust’s biggest bet with more than 13% of its funds tied up.

Finsbury Growth & Income and City of London stand apart from both Scottish Mortgage
and Woodford Patient Capital in their chosen investment universe, concentrating largely on UK-listed large cap companies, and ones that pay decent dividends too.

The respective share price performances set the pair apart. Finsbury, managed by star manager Nick Train, has put up returns around double those of City of London over the past three and five years. That makes their makes their similar premiums to net assets (about 1%, give or take) all the more puzzling. (SF)

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