Four investment trusts for your ISA

By Chris Salih on 7 March 2023 in Investment Trusts

Financial markets currently face a number of formidable foes in the shape of rising interest rates, inflation, and the ongoing economic and geopolitical fallout from Russia’s invasion of the Ukraine.

If you just read the headlines you’d think now was simply a time to forget about investing and batten down the hatches. However, history shows us it is time in – and not timing – the markets, which reaps the best long-term rewards.

Heading into recession

Let’s be clear, there are challenges. We do appear to be heading towards the most telegraphed recession in history. The US bond yield curve is inverted – that means I can lend to you for two years and you’ll make more money than if I were to lend to you for ten years. It’s counter-intuitive and has signalled every recession since 1960.

However, recessions tend to come with higher unemployment, yet we are almost in full employment in the developed world – everything does not always follow the same pattern.

Have stock markets bottomed?

But back to the pessimism in markets – if you strip away that negative noise you’ll notice that most asset classes actually bottomed in October 2022 and have performed reasonably well since. Take global equities, for example: they are up almost 10 per cent in the past six months alone*, yet there remain significant valuation opportunities across a number of markets for investors to tap into.

But how? The truth is you need flexibility in times like these. Investments trusts do offer some additional attractions in this climate. As with funds, they can invest in any sector or geography, but with a number of differences.

Investment Trusts – the key differences explained

1. Closed ended

This means if you try to buy a trust’s shares after it launches you can only do so if an existing investor wants to sell theirs. Contrast this with a unit trust or OEIC (open-ended funds), where the manager makes it possible to invest by creating new units and then invests this new money.

However, when investors want to sell in an open-ended fund, a manager may have to sell an investment(s) in order to meet redemptions. When you sell shares of a trust, the manager doesn’t have to sell any assets, but you have to find someone to buy the shares from you.

2. Market sentiment

As an investment trust is a company, market sentiment can also dictate its share price. This may move above or below the value of the assets, known as the Net Asset Value (NAV). When it is above those assets it trades at a premium, while below means it is a trading at a discount.

But be warned, sentiment is not always correct – a trust trading at a discount could be an opportunity, while another at a premium could be overpriced.

3. Borrowing to invest more

This is known as gearing and is often used when a manager sees a rise in a certain stock or sector. If that stock or sector rises in value it can boost returns for the trust, but should they fall it can easily make the losses greater – it means the trust carries extra risk.

Why does it matter now? These extra tools are always useful, but the uncertainties of the next 12 months undoubtedly make them even more attractive as when there are challenges there are also opportunities.

Below are four investment trusts to consider for the 2023 ISA season

Old fashioned equity income

Things that have looked unattractive for many years are suddenly turning heads – a good example might be traditional UK equity income funds. Once the bedrock of many an investor’s portfolio, these funds have been disliked for the past decade as returns from a value-tilted FTSE 100 have paled in comparison to US tech behemoths such as Amazon and Apple. That has now reversed.

A good option here is The City of London Investment Trust. One of the longest-running investment trusts in the UK. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It currently yields 4.7 per cent**.

Smaller companies

Small-caps are always in the eye of the storm, and while the UK is particularly attractive for this part of the market – they are also extremely attractive on a global scale.

Managed by Peter Ewins, The Global Smaller Companies Trust invests directly in businesses in the UK, North America, and Europe. The team invests in other small-cap funds to gain exposure to Asian, Japanese and higher-risk emerging market companies. Peter and his team look for companies with strong franchises and good quality, motivated management teams, where share prices do not look expensive.

This trust could be an excellent option for investors seeking exposure to smaller companies, who are aware of the additional risks in this part of the market. It is currently trading at an attractive discount of 13.3 per cent**.

UK equities

UK equities remain one of the most unloved parts of the world as the overhang of Brexit and the uncertainty of the pandemic have hit particularly hard on sentiment.

I’d consider the Schroder British Opportunities Trust here, which was launched in response to Covid-19 and invests in 30-50 small and medium-sized public and private businesses requiring fresh injections of equity. The uncertainty surrounding UK PLC is highlighted by 32 per cent discount on the trust***.

Chinese equities

This is the riskiest of my suggestions – but attempts to tackle Covid and the troubled property sector, coupled with extremely attractive long-term valuations, mean China is becoming interesting again. China is not as cheap as it was a few months ago but it still down significantly prior to government intervention in certain part of the economy in early 2021.

JPM China Growth & Income invests in ’Greater China’ companies which are quoted on the stock exchanges of Hong Kong, China, and Taiwan. Launched in 1993, the managers are growth-oriented investors who target higher quality companies within their ‘best ideas’ approach to the region. The trust also pays a target annual dividend of 4% of the company’s net asset value.

*Source: FE fundinfo, total returns in sterling, 14 October 2022 to 6 March 2023
**Source: FE fundinfo, 6 March 2023