Perscribed investment: the global rise in healthcare spending is one of the most significant trends of our era.
An investment trust is a listed company that buys shares and other investment assets on behalf of its shareholders.
These trusts are similar to other, more popular, managed funds called unit trusts or open-ended investment companies (OEICs). However, unlike the units you buy in these other types of fund, shares in investment trusts are “closed ended”, which means there is a finite number of them, so the price can go up and down according to demand.
The shares can trade at a premium or discount to the net asset value of the investment trust — when the total value of the shares is higher or lower than the value of the underlying assets.
When they trade at a discount, this can provide an opportunity to buy access to the shares of the companies the trust invests in at a lower price than buying those shares directly.
Investment trusts also have the ability to leverage up — to borrow money in order to finance new investments — which can magnify returns when profits are made, pushing up the share price. Of course, this can also magnify losses, so there are risks.
This week David Coombs, head of multi-asset investments at the wealth manager Rathbones, gives his view. Coombs, who is 52 and lives near Reading, manages four Rathbones funds and is in charge of £429m of investor cash.
He said: “When running my funds, I often use investment trusts. These work in a similar way to unit trusts and OEICs, in that investors pool their cash to buy a diversified spread of companies and other assets. Investment trust shares are traded on the stock market. It means investors can simply sell their shares when they want. When more investors want to sell than buy shares in an investment trust, its share price drops, as it would with any other company.
“With unit trusts and OEICs, the fund manager may have to sell assets in order to pay investors who want to cash in their holdings.
“In some cases, where there is a rush to sell holdings in a fund, investors may need to wait until the manager sells an asset — like property — in order to pay the investor.
“Three of my favourite long-term investment trust ideas are below. I would divide my £10,000 equally between the three.”
Biotech Growth Trust (down 0.83% over a year), 708p
The global rise in healthcare spending is one of the most significant trends of our era. As people in the West live longer and the middle classes expand in emerging-market economies, the amount spent on healthcare is growing rapidly.
Technological innovation is pivotal here. For these reasons, I hold the Biotech Growth Trust. This investment trust has delivered exceptional returns over the past few years by riding a wave of mergers, acquisitions and innovation. I believe this should continue: more drugs were approved in 2015 than in any year since 1950.
Some caution may be warranted given the election of Donald Trump, however. His plans to roll back parts of Obamacare could cause upheaval in the healthcare and pharmaceutical industries, which would hurt the performance of the trust.
The trust was trading last week at a discount to its net asset value of 4% and closed on Friday at 708p. The annual charge is 1%, but a performance fee may apply. [The annual charge is paid on top of the fee you pay the investment platform or broker you use to make the investment. That charge may vary as different platforms can negotiate deals with different investment trusts. The same applies to the two other trusts below.]
Allianz Technology Trust (up 27% over a year), 817p
Healthcare is not the only area that is benefiting from an explosion in technology. “Disruption” is a tired buzzword, but that is only because it is the dominant theme of our age. It is easy to be blasé about the umpteenth food delivery app start-up. However, the rate of technological development over the past 20 years has been breathtaking.
We have gone from prohibitively expensive and primitive mobile phones to a compact personal computer in every pocket. This change has driven tectonic shifts in how we make, distribute, buy and sell products.
Automation and the use of robotics have revolutionised factory floors in ways that were science fiction only decades ago. This pace of change does make tech a risky area, though. Products and whole businesses can become obsolete as tomorrow leaves them behind.
I invest in the Allianz Technology Trust because it has a strong and lengthy record and focuses on these themes. The annual charge is 1.1% and the trust is trading at a 4.8% discount to net asset value.
Strategic Equity Capital (down 7.6% over a year), 199.5p
For my final pick, I would choose the Strategic Equity Capital trust, which focuses on smaller companies. It has had a rough year, with its share price falling in spite of the market value of its assets rising. As of December 1, the share price stood at a discount of close to 12% to the value of its assets, which suggests good value.
This fall in price exemplifies one of the risks of investment trusts: they can be extremely volatile in the short term if sentiment turns against them or their sector.
Despite this underperformance, however, I remain confident in the managers. They are active managers who also advocate on behalf of the shareholders.
I think the future looks bright for UK smaller companies, so this trust remains an attractive option for me. The annual charge is 1.36%.