Investment trusts are public limited companies (PLCs) traded on the stock exchange. So, in that respect, they are just like any other shares we may buy, such as BP or AstraZeneca.
But unlike companies owning businesses outright, investment trusts earn their living by buying the shares of other companies or by owning other financial assets. And I reckon they are a decent way of achieving diversification in a portfolio.
Risks and positive potential
The investment trusts I like most tend to focus on publicly listed shares. So, they can be a great way to capture some of the gains (or losses) of a particular investment strategy. And that’s because they are run by an investment manager and their team.
But buying shares in an investment trust means we effectively outsource responsibility for running the strategy. And things sometimes go wrong. Or perhaps a trust simply underperforms other funds running a similar strategy by a smaller but persistent margin.
So, investment trusts come with risks as well as potential. But I’ve got a few of them in my portfolio alongside my own stock picks. And one that I’m optimistic about is Finsbury Growth and Income Trust (LSE: FGT). I’ve held it for some time. But the question for me now is, should I add to my investment?
The trust’s portfolio manager is Nick Train. And he runs it as a concentrated portfolio of around 30 stocks aiming to target high-quality businesses.
The aim is to capture multi-year returns from companies capable of compounding their earnings over time. So, he looks for businesses with strong brands or powerful market franchises.
The strategy is similar to that of billionaire US investor Warren Buffett. And just like Buffett, Train aims to buy stocks that are below his estimate of the company’s true worth. Then he holds them for the long term, “regardless of short-term volatility“.
What’s under the bonnet?
We can get a strong idea of what we are getting for our money with Finsbury by looking at the top 10 holdings. Together, they make up around 83% of the money invested in the trust. They are Relx, Diageo, London Stock Exchange, Unilever, Burberry, Mondalez, Experian, Sage, Schroders, and Remy Cointreau.
I’d describe all those businesses as quality operators with a price tag to match. Indeed, FGT is not looking for bargain-basement companies or deep-value situations.
However, during the decade between 2009 and 2019, the trust’s share price rose by around 470%. And that suggests the returns from the strategy have been worth having. Nevertheless, the share price peaked at just over 950p in September 2019. And that’s not too far away from today’s price near 858p. Meanwhile, the trust’s price-to-book value is near one, suggesting a price that’s up with events.
And over the past year, the stock has slipped by just under 2%. But I think the underlying businesses have a good chance of performing well over the next 10 years. Although, nothing is certain and I could easily be wrong. Or, perhaps, good performance in the business may not translate to decent stock gains.
Nevertheless, I’m optimistic and would top-up my position in FGT now if I had some spare money to invest.
