I rarely review investment trusts, not because I do not like them but because they are a niche area for the vast majority of investors and brokers.
I realise that Daniel Godfrey at the Association of Investment Companies is keen to promote them and clearly believes that commission is the cause of the problem. Hence, his support for the retail distribution review which he somehow believes will turn investment trusts into mainstream investments on the back of fee-based advisers.
I have to say I think he is completely wrong. Most fee-based advisers are not investment people but very good financial planners, so I do not see why they should suddenly switch to putting lots of client money in investment trusts.
The bigger problem for brokers is the liquidity of most trusts – you simply cannot buy the amount you need. Not only that but you will then probably have to explain to clients why you have traded outside the bid-offer spread. So as much as I like investment trusts myself, I do not believe their structure can ever make them mainstream.
Despite that, there is no doubt they can do a superb job for some individuals. This week I shall look at Caledonia investment trust, first because I hold it myself and, second, because I think it is a great long-term buy and something to tuck away in the bottom drawer.
The managers of Caledonia Investments aim to hold stocks for at least 10 years. The trust invests principally in the UK although the managers have the freedom to go overseas when they spot attractive opportunities. Currently, the portfolio is 75 per cent invested in the UK, with 8 per cent in Europe, 8 per cent in North America and 9 per cent in Asia.
The managers are looking forward all the time and searching constantly for the next area of potential. For example, the trust now holds 5 per cent of the portfolio in India.
It has significant exposure to the financials sector but not the banks that have struggled so much recently. Instead, the managers have bought shares in other investment managers such as Polar Capital, Rathbone and Close Brothers.
The latter is the trust’s biggest holding at 10.9 per cent. The second biggest position is another of the big name investment trusts – British Empire.
Investors in the trust also get exposure to unlisted shares that they would not normally be able to access. These account for around 15 per cent of the portfolio. One of them is the private equity vehicle Apax Summer which holds a controlling interest in business information provider Incisive Media.
The objective of the trust is to provide a positive return over five-year periods while paying a growing income to investors. It has now increased its dividend for 40 consecutive years, which is a truly remarkable achievement.
So why has it done so well over the years? The company and its management have extremely good contacts, meaning that they often get first refusal on potentially lucrative long-term investments.
So committed are they that in most cases they have a representative on the board of the companies in which they invest. While they do not wish to actually manage the business themselves, having a representative on the board does give them a huge insight into the workings of the company and also a position to influence the decision-making process where necessary.
Investment is very much a people business and Caledonia Investments chief executive Tim Ingram sums it up well by saying: “It’s people that make money, not sectors.”
In my opinion, the managers of this trust are some of the best and smartest managers in the investment trust sphere. I hold it in my own Isa and I expect it will be there for many years.
Mark Dampier is head of research at Hargreaves Lansdown