Choppy waters
Ian Cowie explains how to diversify with investment trusts
“Diversification is the simplest and surest way to diminish the uncertainty and potential for losses inherent in stock markets.”
Donald Trump’s tariff tantrums - first increasing these taxes on American imports, then pausing them until July 9 - have made share prices even more unpredictable in the short-term than they always are. Fortunately, investment trusts offer a tried and tested way to cope with such volatility, which makes it less risky for shareholders to seek medium or long-term returns from capital growth and dividend income.
Diversification is the simplest and surest way to diminish the uncertainty and potential for losses inherent in stock markets. Share prices can fall without warning and investors might get back less than we put in. Dividends are not guaranteed and can be cut or cancelled without notice.
But if investors follow Granny’s advice not to put all our eggs in one basket, this will reduce our exposure to the danger of disappointment in the form of setbacks or catastrophic failure at any one company, country or currency. That’s easier said than done directly because most of us only have limited money to invest and dealing costs also restrict how many individual shares we can buy.
However, pooled funds - such as investment trusts and open-ended vehicles such as unit trusts or exchange traded funds (ETFs) - make it convenient and cost-effective to spread even relatively small sums of money over dozens of different companies, countries and currencies. Pooled funds can also enable individual investors to share the cost of professional stock selection in sectors where we may know next to nothing.
For example, two of my longest-held investment trusts demonstrate how this shareholder’s ignorance of the underlying assets was no obstacle to achieving capital growth. It’s more than a decade since I began buying shares in the self-descriptive investment trust, Polar Capital Technology (stock market ticker: PCT).
As my cerebral software dates back to the 1950s, I must admit that much digital technology - especially artificial intelligence (AI), the cloud and quantum computers - is quite beyond me. But this investment trust enables me to participate in the wealth that technology has created since PCT shares I transferred from a paper-based broker at the equivalent of 43p in September, 2013, allowing for a subsequent 10-for-one stock split, traded at 336p this month.
Similarly, I know few individual businesses listed on the Bombay Stock Exchange but believe that India offers many opportunities to investors. That’s why I paid 63p per share in what was then Fleming Indian in June, 1996, for what became my very first ten-bagger or share whose price soared tenfold and what is now listed as JPMorgan Indian (JII) traded at £10.86 this month.
Both those investment trusts demonstrate how diversification can not only reduce risks but maximise returns by enabling individual shareholders to gain exposure to sectors that might otherwise remain out of reach. For example, only the largest investor could obtain direct equity stakes in wind farms or other forms of renewable energy but Greencoat UK Wind (UKW) and Ecofin Global Utilities and Infrastructure (EGL) give me exposure to income and growth from both.
“This ability for investment trusts to bring the world within reach is particularly valuable with foreign smaller companies, which might have the greatest scope for gains but are unlikely to be household names to British investors.”
This ability for investment trusts to bring the world within reach is particularly valuable with foreign smaller companies, which might have the greatest scope for gains but are unlikely to be household names to British investors. That’s why I am a long-term shareholder in smaller companies funds as diverse as Baillie Gifford Shin Nippon (BGS) in Japan; Edinburgh Worldwide (EWI); European Assets Trust (EAT); India Capital Growth Fund (IGC); and JPMorgan US Smaller Companies (JUSC).
Returning to where we began, with Trump’s tantrums taxing the patience of many investors and industries, investment trusts make it easy to allocate some assets elsewhere. American shares in general and technology in particular have enjoyed terrific runs for more than a decade but that does not mean this will continue forever. With more than 300 investment trusts focussed on different companies, countries and currencies, there is plenty of scope to diminish risk by diversification.
Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS); Edinburgh Worldwide (EWI); European Assets Trust (EAT); India Capital Growth (IGC); JPMorgan Indian (JII); JP Morgan US Smaller Companies (JUSC) and Polar Capital Technology (PCT) as part of a globally-diversified portfolio.
