Behind the Headlines: How investment trusts changed during Queen Elizabeth II’s reign

While it may simply mean an extended weekend for some, the Queen will celebrate a Platinum Jubilee this week, marking 70 years of service.

The world has seen tremendous changes since she ascended the throne on 2 June 1953: the fall of the British empire, the Cold War, the creation of the European Union (as well as Brexit), and more recently coronavirus to name a few.

The Queen has also witnessed several economic crises. You may think of the 1973 oil crisis, the global financial crisis in 2008, or the ongoing Covid-19 recession.

Seventy years on the throne is a record for a British monarch, but it is actually not that much compared to the investment trust industry.

In fact, some investment trusts still in existence predate the coronation of Elizabeth II.

Research from the Association of Investment Companies (AIC) shows that 35 investment companies already existed at the time of the Queen’s accession to the throne. Their current aggregate assets is around £55bn.

AJ Bell head of investment analysis Laith Khalaf says: “The UK investment trust industry can chart its history back to 1868, when Queen Victoria sat on the throne, and Foreign and Colonial Investment trust was launched.

“Many of the first investment trusts were created in Scotland to house the wealth created by the jute boom in the latter half of the 19^th century, and a good number retain their Scottish heritage through their names and their management today.

“The trust is still going strong today, having witnessed the reign of six British monarchs, though it’s investment focus is now global shares, rather than the overseas government bonds it held at launch.”

Unsurprisingly, investments trusts’ focus has evolved since the 19^th century.

For former AIC chair Hamish Buchan, the growth of alternatives has been a game changer.

He says: “Without doubt this has greatly increased the size of the sector and its appeal.

“Alternatives offer a service to private investors and wealth managers, who can’t invest in those assets themselves, whether it’s infrastructure or renewable energy companies for example.”

This is also the view of Temple Bar director Charles Cade who joined the investment company industry in the early 1990s.

He says: “Around half of the sector’s assets are now represented by alternatives, with the introduction of a broad range of new mandates including infrastructure, renewable energy and specialist debt.

“The equity funds have tended to become more specialist, with far greater active management at the expense of index-hugging funds.”

Another significant change for investment trusts has been the shift in the nature of investors.

Buchan adds: “In the 1970s, investment trust investors had to tolerate a fluctuating capital gains tax regime and the complications of exchange controls and the dollar premium.

“The abolition of all this under Mrs Thatcher led the way for a much more attractive tax and investing environment for investment companies.

“The late 1970s saw pension funds begin to bid for investment trusts to increase the value of their holdings in them.

“Pension funds and institutional investors also began to develop their own research departments and no longer needed to hold investment trusts as they could buy individual shares.

“This led to the start of the transition of ownership of investment trusts from institutions to private investors and wealth managers.

“Bringing the industry back to its purpose when it was launched in 1868 – to give the ‘investor of moderate means’ the same benefits as professional investors.”

How to explain the longevity of investment trusts? For Premier Miton Global Renewables Trust chair Gill Nott, this is due to their ability to “weather financial storms”.

He says: “When stocks fall and investor sentiment turns against a trust, the fact that the trust can trade at a discount, and not face a downward spiral of withdrawals, gating or even wind-up, means that it can live for another day.

“Thus it can potentially deliver value to those who stick with it when markets bounce back.”

Cade highlights that the sector has several key advantages, such as the security of dividends due to the ability to use revenue reserves, and access to less liquid asset classes.

“The ability to take a long-term approach gives investment companies the potential to deliver strong performance over the market cycle without the threat of suffering redemptions at times when the manager’s investment approach is out of favour which is another advantage of investment companies,” he adds.

Despite its longevity, the investment trust industry is not so dominant anymore, as it had to cede its crown to unit trusts.

Khalaf says: “The first such fund was launched by M&G in 1931, and today open-ended funds account for around £1.5trn of investment, compared to around £270bn from investment trusts.

“Of course, the closed-ended nature of investment trusts limits their size compared to their open-ended cousins.

“Consider that after 150 years, the F&C Investment Trust is one of the biggest in the market, with assets of £5.6bn, while the open-ended Fundsmith Equity is worth £25.5bn, a little over a decade since it was launched.”

Yet, Capital Gearing manager Peter Spiller argues that investment trusts have performed better than unit trusts over the last 50 years.

He says: “Investment trusts have in broad terms produced better results than their open-ended equivalents over the last 50 years, but they remain something of a niche product.

“In that period, open-ended funds have gone from being smaller than equity investment trusts, in aggregate, to a current level several times their size.

“Partly this has been due to trail commission, a distorting factor that has thankfully been abolished.

“Several trusts have managed to buck the trend by using a zero-discount mechanism, and in most cases, this has led to significant growth because it eliminates the threat of volatile discounts.

“This allows the virtues of investment trusts – independent boards, the possibility of modest gearing, and better performance – to come into greater prominence.”

That being said, investment goes beyond investment trusts and unit trusts.

As for any event with a relatively historical dimension, a range of one-off items are being sold to celebrate the Queen’s Platinum Jubilee.

For instance, the Royal Mint released a number of limited-edition coins for public sale.

Other goods available for the occasion include among others cups and saucers from souvenir stalls. Yet, Interactive Investor senior personal finance analyst Myron Jobson warns that those products are not likely to gain value.

He adds: “If you are buying memorabilia for investment purposes, it is best to look for items that are high in quality, produced in limited runs and have a personal connection to the royal family.

“Pottery makers like Royal Doulton and Wedgwood, which hold the royal seal of approval, also produce collectable pieces which can hold value.

“But like all Royal commemorative pottery, a chip or crack can render items almost worthless – this is why commemorative coins are more popular among collectors.”

Investment companies launched at least 70 years ago with total assets as at 20 May 2022

Source: Morningstar, AIC