Investment Trusts


The Basics

Investment trusts can claim a pedigree as long as the cash register, with the oldest going back more than 150 years. Unlike a cash register, there is no guarantee that they’ll dispense cash, but they have done a good job of growing wealth over the years, which explains their enduring popularity.

At heart they are just another collective fund, not dissimilar from a unit trust or OEIC. They bundle together your savings with those of other people and a fund manager invests them in stuff – shares, bonds, property – which they believe will increase your wealth over time.

They come in a variety of flavours, investing in different areas of the stock market – Europe, the US, or smaller companies for example. There are also trusts investing in more unusual areas – infrastructure, care homes or renewable energy. Investment trusts also come with a few bells and whistles, which can make them a useful tool for those who need an income from their investments.

In a nutshell

• Trades like a normal share on the London Stock Exchange
• Invests in a diversified mix of investments – a good one-stop shop
• Typically costs around 0.65% per year
• Available on all the major platforms, but watch how they charge for them

Is It Right For Me?

Good if you ...

  • Are comfortable with stock market risk
  • Want access to lots of companies at low cost
  • Need an income from your investments

Not Good if you ...

  • Want to pick your own shares
  • Can't tolerate variation in your capital
  • Don't want to pay fees to a fund manager

The Numbers

The Benefits

• Access to a ready-made, diversified bunch of investments

• Allows you to invest in a wide range of companies and businesses, plus fixed income, property and exciting niche areas such as renewables

• Allows you to invest around the world

• Allows you to build a valuable income stream

The Detail

What sort of investment trust do I need?

That, of course, depends on you – how much risk you want to take, how long you have to invest, how much cash you have. If you have no firm idea about where you want to invest, there are lots of generalist investment trusts that invest across the world, giving you a bit in, among others, the US, China, Europe and Japan. These are the oldest, largest and best-established trusts, including Witan, Scottish Mortgage or Foreign & Colonial.

If you have a particular region in mind, you could home in on that, but you will still need to decide the type of investment you’re looking for. Do you prefer higher octane smaller companies, for example, which give you high potential rewards, but at higher risk? Or would you prefer an investment that pays a steady income?

Investment trusts also offer a way to invest in more unusual areas. There are an increasing range of trusts investing in areas such as renewable energy, care homes or student accommodation. These can provide an interesting alternative to mainstream investments and, potentially, another source of income.

Why can investment trusts be a better option than normal funds?

It would be wrong to claim that investment trusts are fundamentally different to other funds, but they do have some advantages. Their closed-ended structure is key: this means the manager doesn’t have to buy or sell shares when an investor decides to buy or sell. This sounds like a niche point, but can be really important at times of market turmoil: the fund manager can keep hold of their prize investments rather than being forced to sell them to meet redemptions. It also means investment trusts are a better option for assets that aren’t readily traded – commercial property, infrastructure, wind farms, private equity.

Possibly because they allow fund managers more freedom, investment trusts have tended to deliver better returns than other collective funds – the data is complex and difficult to navigate but is from clever people at CASS Business School, so we trust it. Also, investment trusts have a board in place to look after investor interests, so if a fund manager doesn’t perform well, the board can give them a kick, or get rid of them, depending on how bad things get.

There are other quirks that give investment trusts an edge. They can borrow (‘gearing’) to improve returns. Most use this selectively as it can go the other way if markets drop. They can also reserve income in buoyant times to pay it out in bad times. This is useful when companies cut dividend payments. Finally, it is worth noting that the price of the investment trust does not always reflect the price of the underlying assets with trusts trading on a premium or discount. That means investors can occasionally get, say, £100 worth of shares for £90.

How are they charged?

Investors buy investment trust shares just as they would shares in a normal company. As such, the charges are similar: there will be stockbroker’s commission on buying and selling; a small bid/offer spread and stamp duty of 0.5% on purchases. In addition, investors pay the annual management fee of the trust.

The stockbroker’s commission varies considerably and can be particularly important if you are saving regularly into an investment trust. If you’re saving £200 per month and losing £15 every month as a trading fee, that’s money down the drain, so make sure you’re with the right platform.

There will also be major differences between the cost of the different trusts. The larger trusts tend to benefit from economies of scale and therefore will be cheaper. The UK-focused City of London Investment trust and the international Scottish Mortgage investment trust (run by Baillie Gifford) both have an ongoing charge of 0.36%, almost as low as a passive fund.

In general, you don’t need very much to start investing in a trust. However, minimum investment levels and charges are usually set by the investment platform and some have special arrangements for investment trusts. For example, the annual charge to hold investment trusts in the HL ISA or SIPP is 0.45% but is capped at £45 p.a. in the ISA and £200 p.a. in the SIPP.

Why are they good for income investors?

Investment trusts can be a good option if want an income from your investments. They can reserve up to 15% of the income they receive from the investments they hold (interest and dividends, for example), squirrelling it away for a rainy day. If companies have a tough year and cut dividends, the investment trust manager can then use the reserve to shore up the payout to shareholders. This can help give investors a more reliable dividend stream over time.

Some trusts, known as ‘dividend heroes’ have built an astonishing track records of paying out dividends consistently and growing them a little more every year. The AIC currently lists 19 trusts with a track record of year-on-year dividend increases over 20 years or more. There are also a broad range of trusts with more than a year’s worth of dividend payments in reserve.

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