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Congratulations if you resisted the temptation to indulge in Black Friday and Cyber Monday deals. Not every bargain is what it seems, and the stakes are high for our finances in the run-up to the festive period, as we nervously switch the heating on and worry about the cost of living.
But if you didn’t splurge, you may still need to buy presents for your family. I like the frugal four gift rule: “Something they want, something they need, something to wear and something to read.” And the “something they need” is where investments come in — we all need these, whether to provide for education, a deposit on a property, or retirement.
Buying things on sale is a good idea if it’s something you would have bought anyway. And there’s an enormous sale going on in investment trusts, with stock market pessimism creating opportunities for bargain hunters.
Also known as investment companies, investment trusts are long regarded as the City’s best-kept secret. Over the past decade, they have outperformed open-ended funds in 11 out of 16 sectors.
Of course, there are performance exceptions. But investment trusts have several attractive features.
They are closed ended, which means managers can take a long-term view of their portfolio, without the need to sell investments when investors want to cash in. Managers can also borrow or “gear up” to enhance performance.
Investment trusts have independent boards that can replace managers if performance is persistently poor and can also negotiate lower fees. Two boards have changed managers and 26 have reduced fees this year.
Trusts trade like shares on the stock exchange, so when more investors sell, the share price falls. This can create an opportunity for bargain hunters to pick up shares at a discount to the underlying net asset value (NAV) of the investments held in the portfolio.
Since the beginning of the year, the discount of the average investment company widened — from 3.6 per cent to 14.3 per cent (as of November 18 2022). Some 37 investment trust sectors trade at a discount, with only the hedge funds sector trading at a premium.
A trust trading on a discount to its NAV is not necessarily a buying opportunity. There may be a good reason why it is cheap, such as poor performance. But discounts on well-managed trusts with great long term performance can present good moments to buy.
Here I select my discounted investment trust present wish list for family members, from the youngest to oldest. I’ve made them risk appropriate and linked to investment goals and life stages. But please do your own research before you put them in the Christmas stocking with the obligatory Terry’s Chocolate Orange.
Baby
All children can have Junior Isas, in which investment trusts can be held tax efficiently until the age of 18. If a parent, grandparent or guardian had invested £1,000 in the average investment company for a child 18 years ago, it would now be worth £6,089, an annualised return of 9.9 per cent.
Temple Bar Investment Trust is in a sweet spot for value opportunities — value investing involves picking stocks that appear to be trading for less than their intrinsic worth. The trust is predominantly invested in large cap, multinational UK equities, has an attractive yield of 3.58 per cent and is on a discount of 5.74 per cent.
Alternatively, give the ultimate long-lasting legacy to a baby, perhaps using a self-invested personal pension (Sipp). F&C Investment Trust has been around for more than 150 years, invests globally, is well managed and reliable. Its discount has been closing but is still at 2 per cent.
Primary schoolchild
This is for parents who are looking to invest in something over the seven years of primary school for an income stream to support secondary private education. It’s illogical just to invest in the UK for dividends. Fund group Janus Henderson calculates that global dividends face the coming economic downturn better supported by profits and corporate cash flow than at any time since 2011. Henderson International Income trust offers a dividend yield of 4.16 per cent that looks tempting on a discount of 4.56 per cent.
Tech teenager
They need something to spark an interest in investing, so how about a trust that invests in tech brands? Scottish Mortgage’s share price has halved over the past year and it has traded at a discount since the end of April, now at 7.55 per cent. But its managers recently told shareholders that “the vast majority of the portfolio is profitable and generates cash” and they are convinced “innovation is effectively on sale”.
Sustainable mum
She is aware that the average woman’s retirement wealth will be worth just one-fifth of the average man’s, and like many women wants her pension to help preserve the planet. Keystone Positive Change invests for long-term growth in companies whose products or services make a positive social or environmental impact and is trading at a 11.52 per cent discount. The share price has lost 40 per cent since its peak in September 2021, but braver investors may want to take a punt on a new management team at Baillie Gifford turning it around.
‘Fire’ dad
He wants to be “financially independent and retire early” and is looking for something to add spice to his portfolio. Vietnam has a dynamic economic growth story, with a young population and a fast-growing middle class. VinaCapital Vietnam Opportunity is on a discount of 11.36 and has a tasty dividend yield of 3.11 per cent.
Cautious grandparent
They have a low capacity for risk but want to beat inflation over the next 10 years. RIT Capital Partners, the wealth preservation trust that runs money for the Rothschild banking family, has a dividend yield of 1.71 per cent and is on a 10.33 per cent discount. It has been held back this year by exposure to technology and China, but has an exceptional long-term record.
The wealthy investment know-it-all
What to buy them? Impress them with your investment knowledge and pick a trust with festive-themed holdings. Finsbury Growth & Income has exposure to chocolate (Mondelez International), your favourite tipple (Diageo and Rémy Cointreau) and luxury gifts (Burberry), so feels like Christmas to me. At a discount of 5.07 per cent it also looks like a bargain. Manager Nick Train recently increased his personal holdings.
Now all we need is a Santa rally to give these an early boost. Since 1986 there has normally been a rally during December that delivered gains — with the peak usually arriving between Christmas and New Year, according to data from Interactive Investor.
But note that Santa is never a dead cert. In 2018, the average investment trust lost 3.94 per cent. And it would take a Santa rampage to repair the damage wrought on markets during 2022, so prepare to hold any investment trust bargain for at least the next five years.
Moira O’Neill is a freelance money and investment writer. Twitter: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’neill@ft.com. The author has holdings in F&C Investment Trust and Scottish Mortgage Investment Trust.
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