If you want to invest in a high-growth sector but don’t feel comfortable picking individual shares, then a specialist investment trust could be the way to go.
As well as a fondness for index trackers, the Fool has a soft spot for investment trusts. These investment vehicles tend to have much better long-term records than the more conventional unit trust and OEIC funds many of us hold. Yet between us we have around £425bn invested in unit trusts but just £45bn in investment trusts!
There are around 1,400 unit trusts with a five-year record according to Trustnet, with an average gain of around 50% since 2003. There are 200 investment trusts with a similar length track record, but their average gain is almost 90%.
There are various theories as to why investment trusts tend to perform better as a group. Their costs tend to be lower for a start. They are closed funds as well, meaning they don’t need to buy and sell investments whenever their customers add or decrease their holdings. They can also take on debt which can help magnify any gains they make.
I’ve held around a dozen investment trusts down the years with a particular penchant for those that specialise in individual sectors. Often I've wanted to invest in a particular area but felt more comfortable with a spread of investments rather than picking one or two individual shares. I've found selecting a fund that invests in several dozen companies can be an elegant, time-saving solution.
So here’s a summary of some specialist investment trusts I think are worthy of closer attention. I’ve split them into four groups.
Resources
Mining and oil shares get many pulses racing today. The daddy here is the £1bn+ BlackRock World Mining Trust (LSE: BRWM). Run by Graham Birch since 1993, it has an excellent long-term record with the shares up six-fold since 2001. I’ve got a holding in a smaller version, the City Natural Resources High Yield Trust (LSE: CYN), that tends to invest in the junior companies I’m more interested in at the moment.
Both have suffered substantial drops in the last few months and have seen their discounts to net asset value widen significantly to 12% and 17% respectively. So I’m happy to keep holding. The best gains for the sector have passed but there’s still plenty of medium-term potential in my opinion.
Biotech & Pharmaceuticals
There are three funds here, all launched in the mid-1990s. Two specialise in early stage biotech companies, namely Biotech Growth Trust (LSE: BIOG) and Schroder International Biotechnology Trust (LSE: IBT). The largest of the three funds, Finsbury Worldwide Pharmaceutical (LSE: FWP), invests in a mixture of biotech and bigger pharmaceutical companies.
I did very well out of the Finsbury trust in the late 1990s but this isn’t a sector I’ve followed that closely since. Over the last five years, returns haven’t been that spectacular, especially for the Finsbury trust, but they’ve held up relatively well over the last year.
Property & Infrastructure
Property is a dirty word these days of course. The introduction of the real estate investment trust rules a couple of years ago was, in hindsight, a classic sell signal.
Most property investment trusts are relatively new but, with the sector trading at an average discount of 36%, contrarians might want to take a closer look. In terms of old timers, there sole contender is TR Property (LSE: TRY), which can trace its history back to 1905. Its current manager, Chris Turner, has run the fund since 1995. The current discount, at 16%, is low for the sector but high for a fund with such a good long-term record.
One new fund that may appeal is 3i Infrastructure (LSE: 3IN). It’s only been going for around eighteen months and, as the name implies, invests in infrastructure projects. It trades at a premium to net assets unfortunately, but it looks a safer prospect than most in turbulent economic times. HSBC Infrastructure (LSE: HICL) has been around a year longer and offers a similar investment approach.
Technology
Are there any technology investors left these days? They were all the rage in the late 1990s and I had a holding in Polar Capital Technology (LSE: PCT) for a while, making good gains at first but being a little tardy getting to the exit. If you like big US technology stocks then this still represents a good way in.
In the spirit of green bandwagon jumping, I’ve now got a holding in BlackRock New Energy Trust (LSE: BRNE), which primarily invests in renewable energy, energy 'enabling' and alternative energy companies. It’s been around since 2000 and it’s certainly at the high-risk end of the investment spectrum. Its first couple of years were disastrous, with the share price falling by over 80%. Over the last five years, however, its track record has been excellent and it currently trades at a small premium to its net asset value.
So there we go. A quick tour of what’s on offer in the world of specialist investment trusts. Now all we have to do is work out which, if any, of these investment themes will beat the market. Well, no one ever said investing was easy!
Disclosure: Just in case you missed it, Stuart owns shares in City Natural Resources and BlackRock New Energy.
You can buy and sell shares via The Motley Fool Share Dealing Service.
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