On the defensive
Ian Cowie on the impact of Iran
While there is nothing individual investors can do about the terrible human cost of war in the Middle East, we can take action to prevent our life savings from becoming collateral damage. Investment trusts have a tried-and-tested history of diminishing risk by diversification that, in many cases, includes surviving World Wars and the Great Depression.
Although the past is not necessarily a guide to the future, it can put our present worries in perspective and help us cope with current problems. Put simply, with about a fifth of the global supply of oil and liquefied natural gas (LNG) under threat, higher energy costs mean lower profits for many businesses, prompting stock markets to trend downward.
“UK Equity Income investment trusts have delivered an average total return of 13% over the last year because many benefit from exposure to energy shares, where restricted supplies of oil and LNG have squeezed prices higher.”
More positively, this war will produce winners as well as losers on the economic front. For example, UK Equity Income investment trusts have delivered an average total return of 13% over the last year because many benefit from exposure to energy shares, where restricted supplies of oil and LNG have squeezed prices higher.
Similarly, several investment trusts are gaining from substantial holdings in defence businesses, where demand is rising rapidly as Europe rushes to re-arm, after America warned us we must pay more for our own protection. Even if peace were to break out in the Middle East tomorrow, the tragedy of war in Ukraine will continue to remind European governments of the importance of defence.
Less obviously, the soaring cost of energy and agricultural fertiliser – about a fifth of the global supply of the latter comes from the Middle East – is likely to increase food prices and inflation. This makes interest rate cuts, which markets had widely-anticipated, much less likely this year, helping to support banks’ share prices because money lenders gain from higher interest rates.
Coming down from the clouds of geopolitics and macroeconomics, Temple Bar (stock market ticker: TMPL) is the top performer in the AIC UK Equity Income sector over the last year, having delivered a total return of 27%, despite all the bad news elsewhere. Founded in 1926, this £1.2 billion trust benefits from underlying holdings that include the oil giants Shell and BP, as well as the banks Barclays and NatWest.
As its sector name suggests, TMPL has not only generated capital growth but income, too. It currently distributes dividends equal to 4.1% of its share price, having increased shareholders’ income by an annual average of 14% over the last five years, according to independent statisticians Morningstar.
Similarly, City of London Investment Trust (CTY) stands third in this sector over the last year, with a total return of 22%. Founded in 1891, this trust with total assets of £2.9 billion benefits from substantial exposure to the banks Lloyds and NatWest. Its top ten assets also include BAE Systems – formerly British Aerospace – which is the largest arms manufacturer in the United Kingdom.
“City of London is a dividend hero having achieved the remarkable record of increasing shareholders’ income every year for 20 years or more.”
Importantly for income seekers, City of London is a dividend hero having achieved the remarkable record of increasing shareholders’ income every year for 20 years or more. City of London leads this elite group of 20 trusts for longevity of increasing income, having raised dividends for 59 years without fail.
It is important to be aware that dividends are not guaranteed and can be cut or cancelled without notice. On a brighter note, it is an ill wind that blows no good and even bad news from the Middle East and Ukraine has helped some trusts deliver spectacular capital growth.
For example, Seraphim Space Investment Trust (SSIT) is a relatively small fund, with total assets of £338m, that floated on the London Stock Exchange less than five years ago. More than three quarters of Seraphim’s net asset value (NAV) is invested in defence-related space technology – or satellites sometimes described as ‘eyes in the skies’ – and two thirds of the total is based in Europe, including the United Kingdom.
That double exposure to the rearmament trend helped Seraphim shares soar 164% skyward over the last year, according to Morningstar. I know because I paid 53p in March last year for Seraphim shares that trade at 148p now, making this my fourth most valuable holding. One cautionary note: this is a high risk fund with relatively low diversification, being focused on a restricted sector, which pays no dividend income at all.
That’s why some investors, who fear there might be worse news to come from the Middle East and/or Ukraine, may prefer more defensive investment trusts. To be specific, Capital Gearing Trust (CGT), Personal Assets Trust (PNL) and Ruffer Investment Company (RICA) all make capital preservation a priority.
Of course, share prices could still fall further – including those of CGT, PNL and RICA. However, these funds’ portfolios include relatively low allocations to shares and higher holdings of inflation-linked bonds.
Nobody knows what will happen next with military conflict. But the history of investment trusts shows that many have survived global crises in the past, and – along with their current asset allocation – this can give reasonable grounds for cautious hope about the future.
“…it is an ill wind that blows no good and even bad news from the Middle East and Ukraine has helped some trusts deliver spectacular capital growth.”
Data to 30 March 2026. Ian Cowie is a shareholder in BAE and Seraphim Space Investment Trust as part of a globally diversified portfolio of investment trusts and other shares.
