How I’d invest £10k

A lump sum of £10k is a great starting point to build a sizeable financial nest egg. It’s large enough to create a diversified portfolio without taking on too much risk. Owning just one or two stocks or funds in an investment portfolio, for example, can expose one to a great deal of risk. If only one of these investments starts to struggle, it can have a disproportionate impact on overall performance. 

As such, I think it’s better to own at least five individual funds or a similar amount of stocks in different sectors and industries. I reckon this approach offers the best trade-off between risk and diversification. 

There are a couple of trusts I’d invest in for a portfolio. These include RIT Capital Partners, the Scottish Mortgage investment trust and the Scottish American Investment Company. 

Each of these investment trusts provides something different. RIT is focused on delivering positive returns for investors in all market environments. To this end, the investment trust owns a portfolio of alternative assets such as hedge funds, private equity funds, private businesses and real estate. 

In comparison, Scottish Mortgage prides itself on its ability to find growth companies. It has a tremendous track record of finding growth stocks and riding them to profit.

And finally, Scottish American is focused on finding income and growth stocks. To that end, its portfolio is a bit more conservative than that of Scottish Mortgage, and it offers more in the way of income with a dividend yield of 2.6%. 

The road to £1m

According to my calculations, over the past five years, an equally weighted portfolio of these three investment trusts has produced an annual return of around 20% for investors. 

To make up the balance of the five funds, I’d also invest in two index tracker funds. The FTSE All-Share, which tracks the performance of the largest 600 listed UK corporations. And the S&P 500, which tracks the performance of the 500 largest listed companies in the United States. 

My figures show a portfolio of all the investments listed above would have produced a mid-teens annualised return for investors over the past five years.

At this rate, I reckon it would take just 31 years to turn an investment of £10,000 into £1m. With additional contributions of £200 a month along the way, it may be possible to hit this target in just 25 years, according to my calculations. 

So that’s how I’d invest £10,000 in 2021. Of course, this isn’t the only strategy available. A diversified portfolio of high-quality growth stocks may be able to achieve the same returns over the long term. 

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However, a large number of ‘expert’ stock pickers fail to produce value for their shareholders. With this being the case, you need to be careful where you decide to invest your hard-earned money.

Here are two investment funds that have a track record of creating value for their investors, no matter what the market throws at them.

RIT Capital Partners

RIT Capital Partners (LSE: RCP) is one of a handful of companies in the FTSE 250 that is still majority-owned and managed by its founding family. The trust was initially set up by the Rothschild family to preserve and grow their wealth over the long run.

Its managers have done an outstanding job of meeting this goal. A sum of £10,000 invested in RIT at inception in 1988 would be worth £326,000 today. That’s a total annual return of approximately 12.1% per annum.

The trust has achieved this return by investing in a basket of assets, including real estate private equity and derivatives.

Where the firm excels is protecting investors’ capital in volatile markets. That’s why the company could be a great addition to a retirement portfolio.

Unfortunately, due to its defensive nature and track record of creating value for shareholders, RIT is not cheap. It is currently dealing at a premium to net asset value at 5.5%.

Still, considering the company’s track record of creating value for investors, it might be worth paying this premium to be part of the trust’s shareholder register.

It also supports a dividend yield of 1.6% at a time of writing, which is more than you get on most savings accounts.

As such, if you are looking for a trust that can protect your wealth in all market environments, it could be worth taking a closer look at RIT.

Polar Cap Technology Trust

The technology sector has been one of the market’s best-performing industries over the past decade.

However, picking tech stocks can be a risky process. That’s where the Polar Cap Technology Trust (LSE: PCT) can help.

This trust has been navigating the technology industry since 1996. Over the past 10 years, the trust has returned 21.7% annualised. That’s enough to turn an initial investment of £10,000 into £71,000 today.

This track record suggests that Polar’s managers know how to pick tech stocks. While the trust does not offer the sort of asset diversification provided by RIT, its long-term returns suggest that if you’re looking to build a sizeable financial nest egg, this fund is certainly worth considering.

The good news is, today you can buy the trust as a discount. It is currently trading at a discount of 2% to its net asset value. It does not pay a dividend to investors, although considering Polar’s capital growth over the past decade, that’s not too much of a disaster.

The largest holding in the portfolio, making up 9.5% of assets under management, is technology giant Microsoft. The trust charges an ongoing management fee of 1.3% as well as a performance fee for good returns.

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Investment trusts are a great tool to use to help you accumulate wealth quickly. Experienced managers usually run these trusts, and they have more flexibility than traditional open-ended funds. 

Scottish Mortgage Investment

The Scottish Mortgage Investment Trust (LSE: SMT) is a great example. This company, which has been managed by James Anderson since 2000, invests in high-growth businesses around the world. 

Its global mandate means Scottish Mortgage can invest in regions most individual investors would struggle to get exposure to. Around 20% of the trust’s assets under management are invested in Chinese equities, for example. 

Anderson also employees a high conviction portfolio approach. In other words, he’s happy to devote as much as 10% of the trust’s assets to one particular investment. The largest holding is currently Amazon.com. This accounts for 8.8% of assets under management. 

While most investment managers would try and stay away from using this much concentration in a portfolio, over the past two decades, Anderson has proven that he knows how to manage his holdings. Scottish Mortgage has produced a cumulative return for investors of more than 156% over the past five years, outperforming its benchmark by 66% since 2015.

The trust is currently dealing at its net asset value and charges a total operating cost of 0.4% per annum. The dividend yield stands at 0.5%.

RIT Capital Partners

Another trust that you can trust to manage your wealth is RIT Capital Partners (LSE: RCP).

RIT is committed to growing its investors’ wealth over the long term. Founded by the Rothschild banking dynasty, the founding family still owns a majority shareholding. Its investment managers also own a stake in the enterprise. 

The fact that the trust’s managers are happy to invest alongside regular shareholders implies that they will work tirelessly to produce the best results for all stakeholders over the long term. Certainly, since its inception, the trust has not disappointed. 

Founded in 1998, £10,000 invested in RIT at inception would be worth around £326,000 today, including dividends. 

RIT has achieved this performance by investing in a range of assets. The trust owns real estate, private equity investments, public securities and investments in hedge funds. This collection of assets has helped the firm weather market downturns and profit from upswings. 

Considering this performance, and the fact that management is a significant stakeholder, it is unlikely the trust will change its strategy anytime soon. That implies that these market-beating returns could continue for the foreseeable future. 

Unfortunately, the one downside of this trust is its cost. The overall cost is around 4% per year, but considering RIT’s total returns, it seems this is a price worth paying.

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On average, investment trusts tend to have lower management charges than open-ended funds, and historically, they have delivered better returns too.

Preserve capital

For novice investors looking for a defensive investment, then the Ruffer Investment Company (LSE: RICA) deserves a closer look.

The trust was set up in 1994 by Jonathan Ruffer, and is currently managed on a day to day basis by Steve Russell and Hamish Baillie. It aims to preserve capital in all market conditions, while delivering an investment return ahead of that from cash.

The fund does this by investing in a wide range of asset classes, which include equities, bonds, gold and currencies. It’s defensively positioned, with just 45% of its portfolio invested in equities and other growth holdings. The remainder of its assets is mostly invested in index-linked bonds, which protects it from rising inflation and recession risk.

Pricey valuations

To explain the fund’s defensive positioning, the managers say they are worried about pricey valuations in stock markets and technical stresses and skews in financial markets. As they reckon the risk of a sharp sell-off in asset markets remains high, the fund holds significant positions in a number of options and protective illiquid strategies, giving it additional downside protection against a major sell-off.

Although the fund tends to only outperform traditional equity funds during bear markets, overall returns haven’t been all that bad in recent years in spite of its defensive strategy. Over the past five years, the fund has delivered total net asset value (NAV) returns of 19%, earning it a return significantly greater than cash savings.

Higher returns

Meanwhile, RIT Capital Partners (LSE: RCP) may be a better buy for investors looking for higher returns. The investment trust, which is chaired by Lord Rothschild, is renowned for its strong long-term performance and its agile investment approach.

Although, on balance, RIT Capital Partners is still considered as a “risk-averse” fund, it is somewhat more aggressively positioned than the Ruffer fund. On the positive side of things, the fund has delivered superior returns to the Ruffer fund, with a total NAV gain of 61% over the past five years.

Diversified approach

In addition to an equity exposure averaging 44% over the past 12 months, it is also invested in private unquoted companies and absolute return and credit assets. This diversified approach, overlaid with its prudent currency positioning and macro exposure management, should help it to deliver an attractive combination of long-term growth and capital preservation.

Fund management charges are relatively low, with an ongoing charges ratio of 0.66%. Shares in the fund currently yield 1.7% and trade at a 2.4% premium to its last reported NAV.

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Investment trusts are a great option. The best thing about these companies is that they usually have a long history of generating returns for shareholders, which gives potential investors plenty of data to analyse and make an informed decision.

The Herald Investment Trust (LSE: HRI) is a great example. This firm has been operating since 1994, and over this period its net asset value has grown by 1,229%, enough to turn an initial investment of £1,000 into £14,000. This record of value creation makes the trust a perfect investment for the beginner investor.

Global diversification 

Herald invests its cash for investors across the world. At the end of 2017, around half of its assets were invested in growth opportunities in Asia with the other half spread between Europe and North America. Such broad diversification is difficult for the average investor to accomplish, but has numerous benefits. 

Indeed, by investing its assets across the world, Herald’s returns are not going to be held back by the poor performance of just one region. As the European economy has struggled over the past few years, the company has profited from its exposure to fast-growing Asian regions.

Herald’s performance record and global exposure make it the perfect pick for beginner investors although the one downside of the trust is its relatively high cost with an annual ongoing charge of 1.09% per annum. Still, considering its global diversification I believe that this is a price worth paying. Management is also returning cash to investors by way of a share buyback in an attempt to narrow the 13% discount to net asset value the shares are currently trading at.

Protecting your money 

Another investment trust that has a multi-decade record of generating outperformance for investors is RIT Capital Partners (LSE: RCP). 

Since its founding in 1988, the trust has produced an annual return of 12.9%, turning an initial £1,000 investment into just over £38,000. Unfortunately, this performance has come at a cost. The annual charges for this fund are 1.2%, although it does also support a dividend yield of 1.7%, unlike Herald.

RIT’s key goal is capital preservation and it does this by investing across a broad range of assets via a broad array of funds and high-quality equities. The firm also invests in private equity businesses, which produce returns uncorrelated to equity markets, this means it has a degree of insulation from wild market swings. In total, single stocks account for around 10% of its portfolio with the remainder made up of hedge funds and other investment funds, giving it exposure to equities all over the world and a broad selection of financial instruments and assets. 

There’s also a small portion of the portfolio devoted to property, gold and fixed income securities. It would be virtually impossible for the average investor to build a portfolio of this size and diversification, which is why I believe RIT could be an invaluable addition to any portfolio. Even though the trust is expensive, its returns and diversification more than make up for the extra cost incurred.

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These two investment trusts are conservatively managed, with capital preservation as their first priority. While they may not rise as extravagantly as some of their peers in raging bull markets, they don’t fall as heavily when markets crash. By this means, they’ve built up their long records of market outperformance.

RIT large

RIT Capital Partners is chaired by Lord Rothschild and enables private investors to invest alongside the famous family of financiers to protect and enhance their wealth over the long term.

According to the trust’s latest results, “£1,000 invested in RIT at inception in 1988 would be worth in excess of £30,000 today compared to the same amount invested in the MSCI All Country World Index which would be worth approximately £6,700.” And this has been achieved by the trust having “participated in 75% of market upside but only 39% of market declines.”

Part of RIT’s success comes from its ability to invest without restraint. It’s able to allocate capital internationally, across a range of asset classes, both quoted and unquoted. It also utilises the talents of some external fund managers, providing exposure to investment areas (for example, hedge funds) that are largely inaccessible to small private investors.

Currently, with “share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured,” the trust is cautious. It stated in its latest results: “We do not believe this is an appropriate time to add to risk.” Regular quoted equity (long) represents 36% of the portfolio, with the remainder in diverse assets, notably absolute return & credit (25%), private investments (22%) and hedge funds (21%).

PAT on the back

Personal Assets Trust’s investment policy is “to protect and increase (in that order) the value of shareholders’ funds per share over the long term.” As well as the similar philosophy to RIT, PAT shares its current cautious view of markets, stating: “After a prolonged bull market in both bonds and equities we therefore remain focused on capital preservation, not the maximisation of upside.”

PAT’s equity exposure is 43%, with its holdings being predominantly defensive global giants. Its current top five positions are Philip Morris, British American Tobacco, Microsoft, Nestlé and Coca-Cola. In contrast to RIT, hedge funds and private investments don’t feature, with the remainder of PAT’s portfolio being in US and UK inflation-linked and short-dated government securities (44%), gold (9%) and cash (5%).

So, while RIT and PAT share a common investing philosophy and current general outlook on markets, their portfolios are far from identical, making both trusts well worth holding, in my view.

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RIT Capital Partners (LSE: RCP) is one of the most successful investment trusts there is. Chaired by Lord Rothschild, since 1988 the company has produced an annual return of 12.9% for investors, turning £1,000 into £30,000. 

Since 1990, it has returned 470%, eclipsing the FTSE 100’s return of 19.5% over the same period excluding dividends. 

Finding value of the market 

Today RIT reported its results for the first half of the year, which showed yet another strong investment performance. Net asset value per share increased to 1,784p with a total return of 4%, from 1,730p, while pre-tax profit rose to £111.1m from £89.6m.

One of the greatest benefits of investing in RIT is that the firm is able to put its money into unquoted companies, offering a level of diversification not available to most private investors. Indeed, today the company reported that its net quoted equity exposure averaged 43% during the first half and management has been looking for more private market opportunities to reduce exposure to expensive public markets. To that end, RIT has invested in US-based Social Capital LP, which it called one of “Silicon Valley’s leading technology investment firms“. 

Overall, the investment trust is directing its exposure to “investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers,” according to Lord Rothschild. 

Not cheap 

Unfortuntately, because RIT has generated such impressive returns for investors during the past decade, shares in the trust are not cheap. At the time of writing the shares are changing hands at 1,941p, a premium of 8.8% to net asset value. After increasing its interim dividend payout by 3.2% today, RIT is on track to pay out 32p per share to investors for the full-year, giving a dividend yield of 1.6%. 

Still, even though it is trading at a premium to net asset value, if the firm can continue to produce double-digit returns for investors every year, this is one company that you can rely on to increase your wealth. 

Undervalued 

Alliance Trust (LSE: ATST) might be a better choice than RIT if you’re looking for a trust that’s trading at a discount. It has struggled over the past few years, which has resulted in investors avoiding the firm, but a recent shake-up has put an end to the poor investment performance. 

Alliance Trust reported a net asset value total return of 12.4% over the six months to June 30. This compares with a 6.4% return from the MSCI All Country World Index over the same period. The better performance, coupled with the trust’s restructuring has sent its shares higher by 22% excluding dividends over the past year, and there could be further gains ahead. 

Based on the most recent figures, Alliance’s net asset value per share is just under 749p, 4.6% above the current price of 417p. Management has instigated a stock buyback to try and reduce this discount. The shares support a dividend yield of around 1.8%. 

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Do the RIT thing

The £2.9 billion trust is renowned for its strong long-term performance, which continues in its 2016 results, published today. RIT Capital Partners posted a 12.1% rise in net asset value over the year, with a total share price return of 14.2%. The board also signalled its intention to pay a dividend of 32p per share in 2017, an increase of 3.2% over the previous year. However, with a yield of just 1.64%, this more of a growth than an income play.

It doesn’t aim to be a shoot-the-lights out fund, but performance has still been pretty rip-roaring. It is up 73% over the past five years, according to Trustnet.com, against 25% on the FTSE 100 and 33% on its benchmark index. That is impressive, given that it also aims to sell shelter some of its capital from market vicissitudes, which might normally act as a drag on growth. RIT Capital has now participated in 75% of market upside but only 39% of market declines.

Capital idea

By limiting its losses in tough times, RIT Capital Partners has less ground to make up when markets recover, and the fund has delivered a compounded total shareholder return of 12.9% a year since launch in 1988, easily thrashing its benchmark, which returned 6.8%. But it can still put on a show in the good times, for example, over the past 12 months it is up 24%, against 18% for the FTSE 100 and 20% for its benchmark.

This multi-asset international fund is not constrained by a formal benchmark but is free to invest in any global asset classes, with the aim of combining long-term growth with capital protection. It invests in public equity, private investments and a range of specialist external funds, such as the Eisler Capital Fund, BlackRock Frontiers and Martin Currie Japan.

Perfect partner

I owned the shares myself some years ago, with great joy, but that was in the days when I used to chop and change my portfolio, rather than buy and hold for the long term. Otherwise I would still hold it, and it would be one of the best performing funds in my possession.

The trust’s strategy looks particularly attractive in today’s market. Right now it is adopting a more cautious stance, trimming equity exposure, cutting allocation to sterling, shorting government bonds to get exposure to higher inflation, and balancing stock market exposure with absolute return strategies.

RIT Capital Partners has become a victim of its success, as it is currently trading at a whopping premium to net asset value of 7.93%. That is tribute to the respect investors have for this fund. You could wait for that premium to narrow but you might have to be very, very patient. Have you got the RIT stuff?

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