Should you opt for safety first among global trusts?

Over the five years to mid March, the FTSE World and the All-Share indices enjoyed a strong bull run. However, while some global trusts have pulled well ahead of both indices, others have languished far behind. For those contemplating a new investment or wondering whether to retain an existing one, it is worth considering why this has happened.

Most global trusts aim to be attractive long-term core holdings. They do this by taking charge of asset allocation, while many keep their ongoing costs down to well under 1% and some have raised their dividends every year for decades.

However, their priorities and investment approaches vary. And whereas recent frontrunners may continue to outperform while equity markets remain strong, the laggards may prove a lot more resilient when the downturn comes. This is evident from the data in the table, which shows that the top performers over the past five years were near the bottom over the previous five.

In terms of net asset value total returns, Scottish Mortgage Trust, Edinburgh Worldwide and Law Debenture have been exceptionally successful over the past five years. All these trusts have managers who believe well-chosen equities offer the most attractive long-term returns, so they concentrate exclusively on that asset class.

They all back their long-term expectations with gearing, which exacerbated the falls in their portfolios in 2008 and wiped out most of their gains since March 2004. However, their managers kept their nerve, retained significant gearing when the market bottomed in March 2009 and have been richly rewarded.

F&C Global Smaller Companies trust's impressive performance over the past five years is testament to the long-term strength of smaller companies. This tends to be most pronounced in rising markets, but the situation was reversed in 2007-09 when investors lost their appetite for anything illiquid. Still, FSC's results for 2004-09 as a whole were reasonably resilient and, despite using minimal gearing, its 10-year returns are the best in the global sector.

JPMorgan Elect Managed Growth is another recent high-flyer that invests for growth in global equities. Over the past five years the trust has benefited from the gearing in its underlying holdings and from tightening discounts across the sector. These were both headwinds in the latter stages of the earlier period and could be again in the next downturn.

None of these trusts try to time the market by reducing their equity exposure in favour of other asset classes, although they may temper their gearing a bit.

James Anderson, who manages Scottish Mortgage, says forecasting market oscillations is not his strength, and sticking with carefully chosen equities should pay off in the long run. If this results in short-term setbacks, so be it. "We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain," he says.

Capital preservation

The managers of Capital Gearing Trust and Personal Assets Trust have a different approach. Both make capital preservation their top priority, and both fear the global economic crisis of 2008 is far from over and that central bank action will ultimately lead to damaging inflation or deflation.

As a result, they have severely limited their equity exposure and, instead, taken substantial holdings in assets such as inflation-linked government bonds and gold. This proved costly in 2013, which Sebastian Lyon, manager of Personal Assets Trust, describes as a "miserable year". However, like Peter Spiller, manager of Capital Gearing Trust, he expects his cautious approach to be vindicated.

Lord Rothschild, who chairs RIT Capital Partners, has also been too worried about the macroeconomic situation to make the most of the bull market. A multi-asset trust, RIT has had too much in hedge funds, gold and defensive derivatives. Its caution was tempered in 2012, which helped its 2013 results, but Lord Rothschild remains wary.

Like RIT, Caledonia Investments has been held back during the bull market by its diversified portfolio. British Empire Securities' deep-value style has not served it well for some time.