If you are new to investing, one of the main objectives should be to get diversified exposure to a wide range of businesses. The purpose of spreading money among different investments is to reduce the potential risk to your portfolio. As such, diversification has the potential to improve risk-adjusted returns.
But unless you’re starting with a large amount of start-up capital, the transaction costs of investing in a large diversified portfolio can be expensive. Instead, it may be better to use investment trusts to get exposure to the market.
These can be a great way for investors to buy and hold over the long term. They enable people to pool their money together to get exposure to many different companies via a single investment vehicle.
Income and growth
With this in mind, the Temple Bar Investment Trust (LSE: TMPL) is one fund to consider for anyone seeking both income and growth. The trust invests primarily in UK equities, across different sectors, seeking undervalued stocks.
The fund managers use a contrarian approach in seeking “unloved, misunderstood or forgotten stocks”. It intends to hold stocks for long periods, typically around four or five years, and aims to have a slow-but-steady turnover of its portfolio holdings.
Its top five holdings are well-recognised large-cap names, including Shell (6.3%), HSBC (6.2%), GlaxoSmithKline (5.9%), BP (5.3%) and Barclays (4.6%).
The business is particularly suited to its investment trust structure as it enables the fund keep some of its dividend income in reserve, allowing it to top up income in lean years and smooth out dividend payments across the cycle. This, combined with the conservative management of its portfolio, has enabled the fund to raise annual dividends for 34 consecutive years.
This is an impressive feat, especially given that it is one of the higher yielding investment trusts on the market. With shares in the Temple Bar Investment Trust currently trading at a 5% discount to its net asset value (NAV), the fund currently offers a dividend yield of 3.2%.
It has low costs, with an ongoing charge of 0.49%, which includes a management fee of 0.35%.
The Independent Investment Trust (LSE: IIT) is another low-cost option to consider. With ongoing charges of just 0.25% last year, the fund is one of the cheapest on the market.
The Independent Investment Trust seeks to provide good absolute returns over long periods by investing in UK and international equities. Its portfolio consists predominantly of UK companies, but there is a broad spread across large-cap, mid-cap and small-cap names.
The fund consistently keeps portfolio turnover very low, which reduces transaction costs, and is known to hold many of its investments for long periods. Its long-standing position in premium mixer drinks company Fevertree Drinks, which is currently its top position, has been a significant contributor to its recent outperformance. Elsewhere, it is overweight in the retail sector, following recent new purchases in Footasylum and Quiz.
On the downside, shares in the investment trust are expensive. They trade at a 14% premium to its NAV, as the fund is in high demand following strong recent gains. Over the past five years, it has delivered a total return of 157%, against the FTSE All-Share gain of 46%.
Jack Tang has a position in Barclays. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Barclays and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.