Ian Cowie: the two investment trusts I’ve picked for my grandchildren

Losing money is an unpleasant possibility for which every stock market investor should be prepared but I worry more about picking the wrong shares for my grandchildren. It’s one thing to make a mistake with my own money but the prospect of letting down babies who have not yet started primary school is more problematic.

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So, I have played it safe for both of them by selecting long-established, global investment trusts to diminish risk by diversification and maximise their share in the rewards of wealth creation wherever it may occur. Before your eyes glaze over, let me point out that there is nothing dull about the “Global” sector which has beaten the average for all investment trusts over the past decade, five years and one-year periods.

While all types of investment trusts, excluding the outlier, 3i Group Ord (LSE:III), delivered 121%, 34% and 13% over the above three periods, the “Global” sector averages were 219%, 54% and 20% respectively. Global funds even tend to cost less, with yearly ongoing charges averaging 0.48% compared to all investment trusts’ typical fees of 1.25%.

Even so, because I firmly believe that two views make a market, I have chosen different global funds for my grandson and granddaughter. The idea is that sibling rivalry or healthy competition will help to keep them interested.

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Charlie was first to appear and, just short of his second birthday, has got off to a flying start with F&C Investment Trust Ord (LSE:FCIT), the fund founded in 1868 that now has total assets of £5.9 billion. Shares I bought for Charlie in July 2023 at 886p each currently cost £10.22, despite the August “flash crash” and the American market’s more recent bouts of vertigo.

With another 16 years to go before my grandson becomes an adult, Deo volente, it is more relevant to look at FCIT’s longer-term performance with total returns of 212% over the past decade, 57% over five years and 21% over the last year, according to independent statisticians Morningstar. Private equity - or unlisted shares - led the underlying portfolio and comprise just over 4% of this fund’s assets. But other top 10 holdings include familiar names such as the chip-maker NVIDIA Corp (NASDAQ:NVDA), the software giant Microsoft Corp (NASDAQ:MSFT) and the iPhone-maker Apple Inc (NASDAQ:AAPL).

FCIT’s ongoing charges are only 0.49%, but its dividend yield is a trivial 1.4% even after payouts increased by an annual average of 6% over the past five years. The shares are priced on a discount of -9%.

Cressida came into the world last May and I invested on her behalf in Alliance Trust Ord (LSE:ATST) in June, paying £12.14 per share. Sad to say, you could pick them up for only £11.84 this week, but she doesn’t seem in the least bit bothered.

Founded in 1888, this fund with total assets of £3.8 billion has delivered total returns over the usual three periods of 225%, 66% and 16%. So, having beaten FCIT over the medium and long term, ATST seems to be going through a relatively quiet year, which might not be a bad place to start.

The underlying portfolio is led by the online retailer Amazon.com Inc (NASDAQ:AMZN), Microsoft and the credit-card firm Visa Inc Class A (NYSE:V). Other familiar names in the top 10 include Nvidia, the online search engine Alphabet Inc Class A (NASDAQ:GOOGL) and the distiller Diageo (LSE:DGE).

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ATST’s ongoing charges are higher than FCIT’s, at 0.62% but should come down with economies of scale after the completion of its imminent merger with Witan Ord (LSE:WTAN). The shares are priced -6% below NAV.

More importantly for this investor who knows from painful experience how dividends can pay us to be patient, hanging on despite stock market shocks in the hope of happier days ahead, ATST yields 2.2% income. Better still, dividend distributions have increased by an annual average of 13% over the past five years.

It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. However, if ATST can sustain that rate of ascent, shareholders’ income would double in the next five years.

Finally, it is worth mentioning that both these funds are “dividend heroes” having increased their payouts every year for at least two decades without fail. In fact, both have done much better than that, with ATST raising annual dividends since 1974 and FCIT doing so since 1971.

Let’s hope for Charlie and Cressida’s sakes that both investment trusts can sustain their satisfactory historical performance into the future. Let’s hope for my sake that neither ATST nor FCIT beats the other one by too much.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (APPL), Diageo (DGE), Microsoft (MSFT) and has family interests in Alliance Trust (ATST) and F&C Investment Trust (FCIT) as part of a globally diversified portfolio of investment trusts and other shares.