Trusts set up to preserve fortunes of rich families can protect yours too

Terry Smith is one of the shrewdest investors to come out of this country in a long, long time – although he now runs his successful investment operation Fundsmith from the sun-kissed island of Mauritius in the middle of the Indian Ocean rather than the UK (currently enjoying its own bit of sun-kissing).

What Smith doesn’t know about company accounts and investing can be written on the back of a postage stamp. And his track record speaks for itself. 

Since launching investment fund Fundsmith Equity in late 2010, it’s generated average annual returns of 17.6 per cent from a tightly held portfolio of stocks – 29 currently. 

Not even Covid-19 has knocked it off course: the fund is still up more than 7 per cent over the past year.

Smith has done nothing fancy with Fundsmith Equity – ‘just’ identified good sustainable businesses (a scrupulous process that few managers master on a consistent basis) and then invested in them for the long term.

The fund’s current mega size – a cool £18.6billion – reflects its popularity among many private investors. Only Nick Train at investment house Lindsell Train has adopted such a buy and long-term hold approach with a comparable degree of success.

So, when Smith opines on issues of investment importance, it’s worth absorbing into your investment DNA and acting upon. 

His latest view, expressed in a column for the Financial Times, is on equity income – and it’s as strident and controversial as you would expect from someone who knows how money should be invested.

Namely, ‘no one should invest in equities for income’ arguing that if anyone had invested in the average UK equity income fund over the past five years, they would have lost 1.3 per cent a year. 

Investors, he said, would have been far wiser investing for total return, and then generating ‘income’ by selling parcels of shares or units as and when required. Interesting. Very interesting.

But it was what he then went on to say about dividend income that was even more eyebrow-raising. Anyone hell bent on investing for dividend income, he said, should consider investing alongside a family which founded and has control of a public company.

To prove his point, he said that of the 47 ‘family-influenced’ stocks that are listed on the Stoxx 600 – an index of 600 leading European companies – only three have so far cancelled or postponed dividends. 

Family members tend to rely upon the dividend income and so boardrooms oblige by striving to maintain – or even better – increase it.

It’s an argument that applies to a number of investment trusts listed on the UK stock market and whose shares can be readily bought by retail investors. 

These trusts were originally formed to manage money on behalf of rich families such as the hugely wealthy Rothschilds – and still have family descendants as key shareholders.

It is no coincidence that a number of the funds have either longstanding records of dividend growth (Smith’s point) or an emphasis on capital preservation.

James Carthew is co-founder of investment research company QuotedData. He has spent more than 35 years in the City working as an investment analyst and fund manager and agrees with Smith that investing in family-controlled companies – especially investment trusts – can make great sense.

He says: ‘Many of us would like to build a nest egg that we can pass on to our families. A few of the UK’s most prominent investment trusts started out that way. Family fortunes, often made in the 19th Century, were invested in stocks and shares for the benefit of future generations.

‘Investing alongside these founding families can give investors a sense of security. It helps though to have a sense of what the family is after – income, capital preservation or capital growth – and ensure that their ambitions and attitude to risk are aligned with yours.’

Here, The Mail on Sunday gives you the lowdown on those investment trusts where family money still influences the way that they are managed.

THE TRUSTS DRIVEN BY DIVIDENDS

Caledonia Investments is a £1.3billion trust with an international remit. Its roots can be traced back to the shipping empire founded by Sir Charles Cayzer in 1878, although Caledonia did not become a vehicle for managing the family’s wealth until much later on. Today, the Cayzer family owns some 44 per cent of the trust’s shares.

The trust’s investment mantra is ‘conservative generational wealth management’ and it is a long-term investor in both listed and unlisted companies (which are not everyone’s cup of tea). So, among its top ten holdings are US giant Microsoft and unlisted business Seven Investment Management.

Although the trust has comfortably outperformed the FTSE All-Share Index over the past five years, generating a total return of 18.4 per cent compared to the market’s 6 per cent, it is its dividend record that is most eye-catching.

Echoing Smith’s thoughts, it has achieved 52 years of consecutive annual dividend increases, a record only surpassed by three other trusts – City of London, Bankers (both managed by Janus Henderson) and Alliance.

A reassuring record for income seekers against a backdrop of widespread dividend cuts across UK plc although future dividend increases are not guaranteed. The dividend is equivalent to an annual income of 2.4 per cent. The trust’s share price currently does not reflect the underlying assets by a long distance – a result, probably, of its 33 per cent exposure to unlisted companies.

But as Rebecca O’Keeffe, head of investment at wealth manager Interactive Investor, says: ‘Income seekers might not mind the large share price discount of 26 per cent if they are getting more assets working for them to produce a mix of capital and income return.’

Brunner is another trust originally formed in 1926 to run family money on behalf of the Brunners, one of the founding families behind Imperial Chemical Industries (ICI). 

Although the trust is now managed by investment house Allianz, the family continues to hold at least a quarter of the shares and they have a representative – Jim Sharp – on the board to represent their interests.

Like Caledonia Investments, it is the trust’s income bent that is most appealing. 

It has 48 years of consecutive annual dividend increases and offers an income equivalent to around 2.5 per cent a year. Key holdings include Microsoft and Swiss healthcare company Roche.

Over the past five years, the trust has delivered overall returns of 63 per cent, impressive given the stock market carnage of the past three months. 

The trust’s annual charges are also competitive at a total of 0.45 per cent. Like Caledonia, it is globally invested although it invests only in listed companies.

Investment trust Witan also has wealthy family links – to the Hendersons, a name with strong links to the City of London to this day (for example, asset manager Janus Henderson).

The fund was set up in the early 1900s to manage the estate of Lord Faringdon – Alexander Henderson. 

Until very recently, Harry Henderson – a family descendant – was chairman of the £1.4billion trust and had a shareholding at the end of last year that is now worth £6.7million. Other family members are also known to be shareholders.

Although the family link is weaker than at Caledonia and Brunner, the trust still has a record of dividend growth going back 45 years.

The trust is globally invested although slices of its assets are parcelled out to investment trusts to manage. The income it generates is equivalent to around 3.2 per cent a year.

ONES WHICH AIM TO PRESERVE CAPITAL

Rit Capital Partners is a £2.9billion investment trust originally set up to run family money for the Rothschilds. 

Today, Lord (Jacob) Rothschild and his daughter Hannah Rothschild – an acclaimed film maker and philanthropist – between them own 21.2 per cent of the trust’s shares.

The trust’s key objective is capital preservation, although, like other investment funds, it has struggled in recent months against falling share prices worldwide. Its share price has dipped 10 per cent over the past three months, but its five-year overall returns of 29 per cent are more than respectable.

QuotedData’s James Carthew is an investor in the trust. He says: ‘I hold RIT Capital because I like the way that it is conservatively run and I trust them not to do anything too risky with my money.’

Interactive Investor’s O’Keeffe says: ‘The trust has a focus on managing investment risk and is very much focused on the long term, happy to provide capital to unlisted businesses and be a patient capital investor.’