Investment trusts that offer shelter from an AI meltdown

With the Bank for International Settlements (BIS) last week warning about the implications of a collapse in demand for equity and debt from AI companies, the Association of Investment Companies (AIC) has asked investment experts which investment trusts could weather any fallout from an AI-related market meltdown.

The BIS said so-called hyperscalers such as Alphabet, Amazon and Microsoft are set to spend around $1 trillion on building critical AI infrastructure throughout 2025/6, but outlined the risks of "cascading defaults" if investment returns came in below expectations and investors withdrew support for the AI specialists.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC)

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: "The AI boom has driven stellar returns for investors over the past few years despite ongoing concerns about a bubble. One argument against the bubble theory has been that the earnings from the big tech giants has been so strong, they have easily covered their expenditure. Now that is changing, and some are issuing debt to fund their AI operations. It's understandable that some investors are looking to diversify their portfolios away from the AI boom and many investment trusts offer a great opportunity to do this."

Expert views and suggested trusts

Saftar Sarwar, Chief Investment Officer at Binary Capital, said: "Correlation is the real risk in current markets. A 'diversified' global portfolio is often not that diversified. Five companies account for around thirty per cent of the S&P 500 - a very high level of concentration. Growth funds, index funds, even so-called balanced portfolios are often exposed to the same handful of names.

"A key diversifier is to look at unloved countries and sectors to see if investment gains can be made here, and that means looking beyond the correlated assets into some very specialist areas.

"UK equities have spent a decade unloved, and undervalued, for exactly the reason that now could look like an important advantage: minimal AI and technology exposure. Trusts such as Merchants Trust, City of London and Law Debenture own UK value or UK traditional equities with dividend yields of around 3% to 4%. The investment allocations here are in financial services, consumer defensive and industrials, with very little in technology. These are good investment trusts if you want to move away from the whole AI theme and believe that the UK offers more compelling equity valuations relative to other markets.

"Temple Bar Investment Trust has a value discipline with the same philosophy, again with very little in technology shares. Temple Bar has 71% invested in the UK, and only 10% in the US. The trust has returned 29% in the past year, with a dividend yield of almost 4%.

"It is good to look past the obvious emerging markets. Korea and Taiwan are now significant technology-exposed equity markets, but so-called emerging frontier markets very much less so. BlackRock Frontiers Investment Trust, for example, has 52% in financials, and investing in countries such as Poland, Egypt and Turkey is an interesting diversifier away from technology-focused core emerging markets. The trust is managed by a very experienced investment team and has gained around 23% over the past year.

"Global equity income managers are also an interesting play away from 'growth' sectors. Invesco Global Equity Income has a 3.3% yield, with shares trading close to net asset value and with only 18% in technology, 45% in North America and 27% in the UK. The trust is up 12% so far this year."

Tomiko Evans, Chief Investment Officer at Crossing Point Investment Management, said: "For investors looking to reduce reliance on AI and mega cap technology, UK equity income is one area worth considering. The UK market has a very different sector composition from global equity indices, with greater exposure to financials, energy, healthcare, consumer staples and other cash-generative businesses. This can make it a useful diversifier for portfolios that have become heavily tilted towards AI-led growth.

"One trust we find interesting is Murray Income Trust. The trust has recently appointed Artemis as managers, bringing a more flexible and cashflow-focused approach to the portfolio. Rather than simply owning the traditional large cap UK income names, the managers can look across a broader range of companies that can generate cash, pay sustainable dividends and offer scope for capital growth. For investors looking to reduce technology concentration without moving fully into defensive assets, Murray Income offers UK equity exposure, income discipline and relatively limited direct technology exposure.

"European equities are another area worth considering. Europe gives investors access to a broader mix of companies across sectors such as industrials, financials, healthcare, consumer goods and infrastructure-linked areas.

"Within this space, JPMorgan European Growth & Income is one option we find interesting. The trust provides exposure to growth, but through a diversified European equity portfolio. Its approach combines quality, value and earnings momentum, allowing the managers to seek companies with attractive growth prospects while remaining disciplined on valuation. The proposed rollover from European Opportunities Trust, where shareholders have the option of switching their money into the JPMorgan trust, is also worth noting, as it could add scale and support liquidity. More broadly, it offers exposure to European companies where growth is coming from a wider range of sectors than technology alone."

Jason Hollands, Managing Director of Bestinvest, the investment platform, said: "For investors who are cautious about the market outlook and sceptical about the AI investment theme, there are several defensive investment trusts featured on Bestinvest's Best Funds List that are worth considering.

"One standout is Personal Assets Trust, managed by Sebastian Lyon and Charlotte Yonge at Troy Asset Management. The trust aims to deliver positive absolute returns over the long term while placing a strong emphasis on capital preservation. It adopts a diversified multi-asset approach, typically investing across equities, inflation-linked government bonds (including US TIPS and UK index-linked gilts), gold-related investments and short-dated government bonds.

"Equities currently account for around 36% of the portfolio, and notably none of the major semiconductor stocks feature among its top ten holdings. While Personal Assets is unlikely to shoot the lights out in a raging bull market, it has historically demonstrated resilience during periods of market stress, making it an attractive option for more risk-averse investors. It is also worth noting that the trust has one of the most effective discount control mechanisms in the investment trust sector, helping to keep its share price closely aligned with net asset value.

"Another trust on Bestinvest's list worth highlighting is Temple Bar Investment Trust, managed by veteran investors Nick Purves and Ian Lance at boutique asset manager Redwheel. The trust invests primarily - but not exclusively - in UK equities, which currently represent around 71% of the portfolio, and follows a disciplined value approach focused on identifying predominantly large and mid cap companies with strong balance sheets that the managers believe are trading below their intrinsic value.

"The portfolio has significant exposure to financials (around 23%) and communication services (16%), with major holdings in the latter being BP, WPP and ITV (rather than the US social media platforms), alongside meaningful allocations to both the consumer discretionary and consumer staples sectors. By contrast, technology accounts for just 2% of the portfolio."