After taking a hammering between 2001 and 2003, the Global Growth sector is keen to re-establish itself in the marketplace - but it will take a lot more than short-term gains to tempt investors back into the fold
So what's so wrong with global growth investment trusts? Plenty, if you believe the media and other commentators. However, the real issue is basic performance, or to be more precise, the performance of such trusts between 2001 and 2003 - a savage period for all equity markets.
A glance at table one highlights the calm before the storm. Then the cracks were beginning to show, but how one envies those longer-term records now. Promoting investment trusts was so much easier, with investors actually beating at the door. Next, look at the position at 31 August this year in table two.
British Empire is the exception to the rule here. Its investment policy of seeking out undervalued assets and an ability to move into cash and fixed interest aided its popularity during the bear market.
The rest of the companies were hammered as TMT fell from grace. In essence, the other trusts shown in the 2004 table failed to disentangle themselves from the technology bubble, remaining too close to a declining index and compounding the strategy by employing gearing in a falling market.
Here, we have trusts that had become too comfortable with benchmarks, and their shareholders have paid a price. However, these billion-pound Global Growth Investment Trusts were far from alone in this destruction of value. Looking at the Lipper figures as at 31 August this year for the unit trust and Oeic Global Growth sector paints a similar picture:
Although complicity can be no excuse for past under-performance, it seems fair to question whether this record merits the death sentence hanging over the sector. We have become all too familiar with the gravestone imagery and headlines such as "dead as a dodo'. It is said that nobody would invent global growth investment trusts now, as if that were a reason to destroy them - but such sentiment seems a little harsh. However, it does serve as a sharp wake-up call, and a reminder that no one owes these trusts a living. They do have to justify their position within the savings market of today.
Each global growth investment trust has the same broad objective, which is to provide investors with outperformance relative to world stockmarkets. They offer diversity across geographical regions, sectors and stocks, and for a competitive price, as many trusts have expense ratios of less than 1%.
If an individual believes in equity investment it is an argument hard to dismiss. If performance was always good it would be impossible to ignore. Herein lies the conundrum - the natural buyers of generalist trusts are retail investors, either through an intermediary or direct.
Witan has some 40,000 retail investment plans in existence, holding more than 20% of the trust's shares. Alliance and Foreign & Colonial also enjoy extensive retail shareholder participation. However, this natural demand has dried up, with performance again the basic reason.
The majority of trusts have not impressed investors in the past three years, yet this disappointment must also be set in an environment where the cult of equity has been battered by the security of cash and fixed interest, and smashed by the boom in property prices.
Trust investors have bought-to-let and built their conservatories. The dismantling of tax-efficient saving has added to this absence of investor confidence and, for good measure, if you throw in a multi-million pound financial scandal or two, people can really get disenchanted.
So here we have trusts without their natural market. In a world of market forces and supply and demand, this is not a great position for any company. As a result, trust discounts have widened and share prices have fallen to levels that tend to attract a less natural shareholder.
The arbitrageur enjoys these opportunities, looking for short-term, rather than long-term, returns. Their interests are not fully aligned with the retail shareholder, despite some claims to the contrary. However, the threat is real and trust boards must react to it and justify the faith of core shareholders - and attract their successors.
So how can the sector re-establish its market place? Obviously, we return to performance. But there is more to it than that.
For too long, the big generalists have all flocked together doing the same thing in the same way. It makes for a crowded market and offers the chance to some of short-term gain through exploiting pricing anomalies.
What is important in the future is that trusts can successfully differentiate themselves to the retail market. It is how they seek performance, as well as performance itself, that will attract the customer. Differing propositions provide the potential for successful marketing in a competitive environment.
The irony for the sector is that this differentiation is actually happening and quickly. While those seeking change call for differentiation, trusts have already begun to adapt.
Witan has rebuilt its investment engine by assembling a team to manage specialist mandates. This approach is complemented by the application of enhanced index techniques to the mainstream UK and US markets. Through this method of investment, the trust looks to beat the UK and the US indices by between 0.5% and 0.75%, something, if you consult your tables, that the majority of active managers fail to do.
The risk saved here can then be applied to markets where growth is more attractive. Witan has put together this package for a base investment fee of 0.16%, which could rise to 0.96% as a maximum should the trust outperform by 4.5% or more
Witan is but one of several large global trusts to re-establish and communicate its offering to the investor. RIT, British Empire, Personal Assets and Alliance have distinctive propositions. Scottish Mortgage, Scottish Investment Trust and Foreign & Colonial are repackaging themselves. This is happening within a reinvigorated environment where even the markets are perking up.
Trusts are seeking to restore shareholder faith and support. This is a much brighter and more positive message for the investor and one which intermediaries should investigate for their clients. It makes a change from the normal doom and gloom.
James Budden, marketing director, Witan Investment Trust
• Global growth investment trusts offer geographical, sectoral and stock diversity.
• Trusts have lost their usual investors so that discounts have widened and share prices have fallen.