Tools of the investment trust

Published by Sonia Speedy on 11 December 2007.
Last updated on 25 August 2011

Inside of a clock

The structure of investment trusts offers some unique benefits to those ready to take advantage of them. An investment trust is a company, so it has a different management structure to other collective investment vehicles, such as unit trusts and open-ended investment companies (OEICs).

Investment trusts have an independent board of directors that meets several times a year to assess how well they are doing. This board has a legal duty to uphold the interests of the shareholders in the trust - its investors. Gavin Haynes, managing director at independent financial adviser Whitechurch Securities, says: "As with all quoted companies, they are required by law to publish their full year results, annual reports and so on, and to hold annual general meetings.

"The key thing is that the board is accountable to the shareholders and therefore management is accountable to the board. If the board believes that the fund manager isn't performing well, they can replace them."

Increased activity from boards

Over the last five to 10 years boards have become more proactive - particularly in the face of arbitragers keen to come in and take over trusts by buying up the shares. "Boards are starting to be more active in implementing management changes, or buy-back schemes," says Haynes.

While this might not sound a big deal to investors, this way of doing things does have advantages, says Adrian Shandley, managing director of Southport-based Premier Wealth Management. He points to the fact that trust managers are largely unaffected by external influences. "If everyone is selling their trust, that's a problem for the unit trust or OEIC manager because he has got to keep ensuring that he's got liquidity to allow people to redeem units."

Daniel Lockyer, a fund manager at investment firm iimia MitonOptimal, says that, because fund managers do not have to deal with inflows and outflows of money from their funds, they can have a lot more conviction in their portfolios. "You can have an unconstrained and more focused portfolio which doesn't get diluted down by inflows."

The ability of investment trusts to use gearing also means that fund managers can increase or decrease exposure to the market by adjusting their borrowing to help make the most of upswings in the market. "That's another valuable tool for the investment trust manager," Lockyer says.

Varying approaches

The strategies and styles of management employed by investment trusts can vary considerably, as they do for other collective investments. "The different styles of investment trusts range from 'plain vanilla' - be it UK equity or large global funds - all the way through to some very specialist trusts with more complicated structures,' Gavin Haynes says.

With around 316 investment trusts - not including venture capital trusts - to choose from in the UK, there are specific investment trusts specialising in particular markets or sectors, such as natural resources or property, while others will invest geographically, say in Europe or in emerging markets around the world.

However, Philip Pearson, partner at Southampton-based IFA firm P&P Invest, believes there is much less overall choice in the investment trust world, compared with that of the collective alternatives. But what investment trusts do offer is access to a wider range of asset classes. "Investment trusts have specialist areas for investment that are currently unavailable elsewhere - examples being hedge funds, private equity, traded life policies and tea plantations," Pearson says.

Variations occur in how much risk an investment trust will take on. "Some are managed more aggressively than others," says Jim Tennant, head of investment trusts at Gartmore. "Some boards will want their manager to manage the fund in an aggressive manner, some will want them to be conservatively managed. Investors understand that," he adds.

The amount of gearing employed can vary in line with the manager's approach.

The style of management that an investment trust employs will also vary. For example, Invesco Perpetual's specialist funds distribution director, Andrew Watkins, says its style is driven by fundamental analysis on a bottom-up basis, while others go for a top-down approach, where there is less emphasis on the merits of individual stocks. "We have to believe in the stock, and it has to be at the right price, with the right sort of growth prospects, a robust balance sheet and prospects of decent dividend growth," Watkins says.

Similarly, some will focus on providing capital growth - making the value of your overall investment grow - while others aim to give investors a regular income from their investment, as well as some capital growth. But this is all within one main share class.

Meeting different needs

Meanwhile, some investment trusts offer several different types of share classes. These are generally known as split capital investment trusts and you get different rights - and different levels of risk - depending on which type you have. The idea is to provide different types of share to meet different investor needs, such as zero dividend preference shares, income shares, ordinary income shares and capital shares.

However, caution is needed when investing in this way, as the extra complexity has cast a shadow over the sector in the past. The problems that split capitals ran into are a reminder that investors need to know what they are getting into. Investment trusts are more complicated than unit trusts and OEICs, and carry the risks and opportunities that gearing and discounts in pricing create.

"I strongly suggest that you do thorough research or seek advice before investing," says Pearson. "Without this, you could expose your capital to a higher degree of investment risk than you feel comfortable with."

Leave a comment