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Why use an investment trust?

4 May, 2017

The difference between a bog-standard collective fund (known as a unit trust or OEIC), and an investment trust could seem a bit, well, niche. With both types, investors get a blended portfolio of shares, hand-picked by a fund manager who should – in theory – know a thing or two about which might go up. But there are a number of reasons why you might pick an investment trust over a unit trust.

There are some really good fund managers who only have investment trusts: Nick Train of the Finsbury Growth and Income trust, James Anderson at Scottish Mortgage, the managers of the Ruffer Investment Company.

  • There are some types of investment that are better suited to an investment trust structure because they don’t have a lot of liquidity i.e. there is not always a ready-buyer for them. This might include smaller companies, companies in certain emerging markets, property or niche assets such as timber.

  • Investment trusts are often good for income seekers. Many have a long track record of paying a high and increasing income, and many have a clear dividend policy written into their investment aims.

  • Some investment trusts have really good savings schemes. They are often super-cheap, and let you contribute as little as £50 a quarter. Witan would be a good example. Baillie Gifford has a good range of trusts, and decades of experience.

If you want the technical detail (we’re not sure you will, but some like it) here you go….

  • Investment trusts trade on an exchange. This means that the price is determined by buyers and sellers, and may not always match the price of the underlying shares. This is called a premium when it trades above the value of the underlying shares, and a discount if it trades below.

  • Investment trusts have various bells and whistles, such as the ability to borrow to invest; also, unit trusts/OEICs have to pay out all the money that they receive in dividends, whereas investment trusts can save it up during fat years and pay it out during lean years, giving a smoother income to investors

  • Investment trusts don’t have to buy and sell units when money come in or goes out of the fund. Again, this seems like a niche point, but can influence the way they are invested.