I recently wrote that I’ll be avoiding Scottish Mortgage Investment Trust because of concerns over further stock market volatility, which could particularly affect tech stocks. The almost inevitable rise of interest rates this year makes a strong case for seeking out value-focused investments. I particularly like the idea of buying into investment trusts because they are diversified, holding multiple shares, and can trade at a discount to their net asset value, thus providing a margin of safety.
An excellent investment trust
The Lowland Investment Company (LSE: LWI), should fit the bill as a share poised to benefit from the appetite for value-focused investments as inflation persists. Top holdings include big UK shares such as Shell, GlaxoSmithKline, Phoenix Group, HSBC and BP.
Shell’s share price has risen by 18% this year, and commodities could continue to do well in an inflationary environment. The flipside of this is that the trust is very UK-focused so if investors continue to avoid the UK, as many institutional big-hitters do, then that may impact the trust’s performance. Its big exposure to financials such as banks and to oil & gas could be an issue too, as both of these industries are cyclical.
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Coupled with net gearing of 15%, which could amplify losses if the trust invests in the wrong companies, this one isn’t without risks.
However, the shares trade on a discount of around 6% (although the discount has been larger in recent times). As well as that, shares in the trust yield 4.46%, which I think has appeal from an income perspective. Charges of 0.59% also compare favourably to other trusts, so I’m thinking of buying shares in it to get diversified exposure to UK value shares.
Better than SMT?
The Schroder Income Growth Fund (LSE: SCF) is another higher-yielding UK-focused pick. The yield is about 4.1%, so that’s good versus most other stock market investments and compared to interest rates as they currently stand. The trust’s top holdings are AstraZeneca, GlaxoSmithKline, Anglo American and Shell.
The immediately obvious downside to this one is that it trades on a premium of about 1% to its net asset value. On top of that, it’s slightly more expensive with a charge of 0.79%. Its consistent record of dividend growth potentially makes that a price worth paying, especially if its underlying holdings do well and push up the net asset value of the trust.
The bottom line is these trusts are quite similar in many ways so I wouldn’t buy both – even though the two of them could well outperform Scottish Mortgage Investment Trust this year and maybe also over the longer term also. It’s a close call between them but Lowland looks to have the slight edge for me based on its lower charges and the fact it trades on a discount.
To recap I think inflation will drive the share prices of these value-focused investments. That’s why I’m keen to add a value investment trust to my portfolio.
