As the saying goes, it’s about ‘time in the market, not timing the market.’ This principle rings especially true for investment trusts, where seasoned professionals guide stock selections, potentially leading to significant gains.

Ryan Lightfoot-Aminoff, an investment trust research analyst at Kepler Partners, sheds light on how a long-term investment approach can be highly rewarding for investors.

With summer now a distant memory, the endless parade of dating shows on television has also concluded. Among the more peculiar editions was ‘Stranded on Honeymoon Island,’ which, unsurprisingly, didn’t achieve much success, as none of the couples remained together post-filming.

While the show’s participants may have failed to find lasting love, their investment portfolios might have flourished in their absence. A recent study highlighted that investors who refrain from constant trading tend to achieve better returns. Thus, being marooned without access to your investments could actually be beneficial for your financial health.

This phenomenon is largely influenced by trading expenses and poor decision-making, often driven by behavioral finance. Investors typically engage in more trades when experiencing fear or anxiety, which usually occurs in declining markets, and then reenter when confidence is restored, generally after markets have rebounded.

The factors contributing to this are trading costs and poor decision making, mostly hinging on behavioral finance drivers. Investors often trade more when fearful or worried, typically when markets are down, before adding or reentering when more confident, usually after markets have risen.

Even inexperienced investors know that ‘sell high and buy low’ isn’t going to be a great strategy. However, as stock markets rise over the long-term, having a ‘desert island’ approach could help investors steer clear of the short-term noise and the pitfalls that come with it, and instead benefit from long-term growth and the power of compounding.

One trust with some of the longest holding periods is European Opportunities Trust (EOT), managed by Alexander Darwall since inception in 2000

Sticking with stocks 

A great example of this is Microsoft. The company has suffered multiple negative narratives over the past decade: concerns its phone business was an expansive flop, fears the cloud business could be swamped by Amazon’s AWS, plus ongoing worries about antitrust regulations curtailing growth. 

These contributed to multiple periods where the shares were down by over 10 per cent, 20 per cent and even 30 per cent in a month. However, thanks largely to a supportive tech environment, Microsoft’s share price is up over 1,000 per cent since September 2015, an annualised return of about 27 per cent.

Similarly, McDonald’s has battled headwinds in the past decade, with changing consumer tastes, a fired CEO and inflation. 

Yet despite this, the company’s share price has still more than tripled, up c. 210 per cent from September 2015, equivalent to an annualised rate of about 12 per cent – an excellent return from a more traditional consumer-focused industry, and ahead of the S&P 500.

In both cases, investors who held their nerve – and their positions – would have benefitted significantly.

However, knowing when it’s best to hold on rather than cut losses can be a very tough decision. 

One solution is to outsource this to a professional manager. The investment trust industry is home to several managers that take long-term time horizons when it comes to stock picking, something that is aided by the closed-ended nature of their funds providing a fixed pool of capital to invest without having to worry about redemptions.

European Opportunities Trust

One trust with some of the longest holding periods is European Opportunities Trust (EOT), managed by Alexander Darwall since inception in 2000. 

Alexander’s strategy is to invest in world-leading companies that happen to be based in Europe, with a focus on the long term. 

A sizeable portion of the top holdings have been owned for over ten years, including Dassault Systèmes, which specialises in 3D modelling software, since 2001; Experian, known predominantly for its credit reporting business, since 2008; and largest holding Novo Nordisk, the firm behind weight-loss drug Wegovy, since 2002. 

Through his patient approach to buying and holding leading businesses and allowing them to grow, EOT has created exceptional returns, with the share price total return of over 900 per cent since inception, despite the challenges the European market has faced in that period.

One trust with some of the longest holding periods is European Opportunities Trust (EOT)

Pacific Assets Trust

EOT is not alone in its long-term focus. The managers of Pacific Assets Trust (PAC), Stewart Investors’ Doug Ledingham and Jack Nelson, view their role as stewards of investor capital and as such look to allocate over the very long term. To do this, they focus on the highest quality companies managed by individuals whose values align with their own.

PAC’s top ten holdings have been held for an average of ten years, with nearly three quarters of the portfolio having been held for over five years. 

The majority of these have either an element of family-ownership or the involvement of the original entrepreneur, meaning they are likely to share PAC’s long-term horizons and look through turbulence to invest for future growth, rather than being distracted by market noise or focusing on short-term earnings reports.

This approach has supported strong returns over the long term, especially in more challenging periods. In fact, PAC has delivered positive NAV returns in nine of the past ten full calendar years, most notably in 2018 and 2021 when the wider market fell considerably. 

Whilst a fall in some Indian holdings’ share price has dampened recent returns, PAC remains confident in the underlying companies’ fundamentals and is reassured that many have been reinvesting to secure their market positions. This approach is likely to be supportive of returns should the Indian market pick up.

PAC’s top ten holdings have been held for an average of ten years, with nearly three quarters of the portfolio having been held for over five years

Aberdeen Asia Focus

One asset class where a long-term investment horizon can really pay off is smaller companies. Those at the lower end of the market-cap spectrum tend to have a longer growth runway before they mature, which can lead to strong, compounding returns over the long term. 

Whilst volatility is heightened due to smaller companies’ vulnerability in more challenging economic periods, they tend to recover strongly alongside the economy, and over the course of a full cycle they tend to deliver better longer-term returns for those willing to sit tight.

One example of a trust that captures smaller companies’ long-term return potential is Aberdeen Asia Focus (AAS), managed by Gabriel Sacks. It has held Indonesian company Bank OCBC NISP for more than two decades, which has shown good resilience through multiple economic crises. 

Its share price has more than tripled since 2005, capturing Indonesia’s increasing financial inclusion, and the stock still offers a yield of over 8 per cent, supporting AAS’ modest and growing dividend.

A more recent example with growth potential is Affle, an Indian consumer analytics business. AAS was an anchor investor at IPO in 2019, from which point the company has grown considerably, returning over 1,000 per cent despite multiple periods where shares drew down over 20 per cent, including the Covid sell off shortly after launch where shares fell over 50 per cent in just over a month. 

Many investors could have easily lost their nerve here, and capitulated on a relatively new stock, but AAS’ managers have been handsomely rewarded. 

The trust has generated exceptional returns over the long-term, having comfortably beaten its benchmark, and delivered exceptional returns of over 200 per cent for shareholders over the past ten years.

One example of a trust that captures smaller companies’ long-term return potential is Aberdeen Asia Focus (AAS)

As these examples show, there is plenty to be gained from a simple buy-and-hold strategy when investing, enabling investors to capitalise on the long-term compounding effects of the market, whilst avoiding pitfalls that come from trying to time the market. 

Obviously, picking the right stocks is crucial, which is where professionally managed investment trusts can prove their worth. These managers have all the resources and experience to help identify the best long-term opportunities, and the ability to hold them for the long run. 

Whilst a stint on a desert island may prove tempting in this environment, perhaps investors could take the less extreme option of selecting a manager with the patience to deliver a lifetime of good returns.

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