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21 January 2002

Growing benefits of an investment trust almost as safe as houses

Readers of a nervous disposition are advised to turn the page now - particularly if they have always believed the well-known phrase or saying that bricks-and-mortar are a sound investment.

Sound they may be, but as the graphic shows, they are far from being the best way to make your money grow over the long term.

The issue of whether you treat your house as your home or simply as an investment vehicle is one for another occasion. But as Ian McLeish, one of the managers of Scottish Investment Trust (SIT) puts it: "The figures show that there are simple ways to achieve strong growth performance over the long term."

Unlike many trusts, SIT is independently managed and not run by a fund management company. The team consists of Mr McLeish and Donald Ness, who were appointed managers in 1986, with a number of investment professionals, all based in Edinburgh.

It is not only one of the big five general investment trusts with £1.1bn (€1.79) in its portfolio - it is also one of the oldest, established in 1887, the year of Queen Victoria's jubilee.

Interestingly, one of its first investments was in shares of the Hongkong & Shanghai Bank - which, in its current guise as HSBC, remains in the portfolio to this day.

With that pedigree, it is hardly surprising that the fund focuses on long-term capital growth, with a fairly cautious strategy - strong in UK and US equities, and with some exposure to other regions and asset classes.

Mr McLeish says that £1,000 invested in the fund back in 1930 would have grown to more than £2m by 2000.

But in typically modest fashion he goes on to say that the same amount invested the following year would have been worth "only" £1.2m 50 years later, because the period would have begun and ended with years in which the market performed badly.

SIT is not highly geared. In March 2000 it raised £150m with a bond issue. Most of the money went into old economy stocks in the UK and the US - avoiding the temptation of the techs - a strategy which has paid off.

Many investors who run their own portfolios argue that fund managers charge over the odds for mediocre performance. That is not a charge which can be levelled against SIT.

One of the big attractions is its low management charges. Fees are just 0.6%, with a maximum of £30 a year for ISAs and PEPs and that cap applies regardless of how many year's ISA allowances you invest.

Although new PEPs are no longer available, investors can switch managers. So if you have poorly-performing or high-charge PEPs with another manager, you can arrange a free transfer to SIT.

And here's another idea. Many investors with a ragbag of small stakes in companies that are no longer part of their core portfolio use the share exchange scheme to buy into SIT's STOCKPLAN.

There is no initial charge and no annual management charge - though you will pay some commission on the sale of your shares and of course stamp duty. Instead, you pay £10 when you want to withdraw some of your cash.

THE WAY THE MONEY GOES Scottish Investment Trust's main holdings

Steady growth ahead - if US leads way

Since there has not been a recession in the UK, investors should not expect a sharp recovery to fuel earnings growth, says Ian McLeish of Scottish Investment Trust (SIT). That means share valuations are reasonable - but not cheap.

He thinks that we are at the "absolute bottom" of the interest rates cycle - but is not making any bets on when the first increase will be.

Meanwhile in the US, he believes that the recovery will be slower than many people expect.

"Corporate profits will not grow as fast as people would like - and that means valuations look stretched," he says. "And if the US does not take the lead, we won't see much progress anywhere else."

"But we are still seeing a downturn in profits - earnings are not yet beating expectations."

SIT makes much of its asset allocation by region or country to reflect different economic and market conditions.

"For example, we are heavy in banks - but not in Japan. We don't say that we like bank shares so we will buy them everywhere."

But some sectors such as oil, pharmaceuticals, techs and telecoms have to be viewed globally because the companies and markets are global.

Like most managed funds, SIT had a miserable time last year, with the share price down 12.3% and net asset value - the value of the stocks and bonds in which the trust invests - 16.3% lower.

But over our favoured five-year measure, the total return is 49% (assuming net income is reinvested) while the NAV has grown 39.2%.

In our view, long-term investors who want to underpin a portfolio with a low-risk, low-cost fund need look no further than SIT.