Investment trusts: everything you need to know

3 October 2018
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Investment trusts: a trusted way to grow your capital – and get an income.

This year investment trusts have celebrated their 150th anniversary.

The forerunners of collective investing, the first investment trust was launched in 1868 as a way “of bringing stock market investing to those of moderate means”.

150 years later there are now hundreds of investment trusts for investors to choose from, enabling them to invest in the stock market from as little as £50 – or in some cases £25 - a month.

What are investment trusts?

Like their cousins, the more commonly held open-ended investment funds, investment trusts pool money from lots of investors to buy a portfolio of shares that is managed on your behalf.

However, there are some important differences, giving them unique qualities that long-term investors should not overlook.

Unlike funds, investment trusts are companies in their own right which are listed and traded on the London Stock Market, just like company shares. In fact, it is for this reason they will often be referred to as ‘investment companies’ – their business is investing assets on behalf of their shareholders. This will include other companies as well as alternative asset classes.

How an investment trust works infographic


Gavin Haynes, managing director of wealth manager Whitechurch Securities says their structure makes them easy to understand.

“They operate in the same way as an ordinary share,” he says. “They also employ an independent board so that shareholders’ interests are represented.”

The directors on these boards meet several times a year and monitor the trust’s performance. If it’s not up to scratch they can replace the fund manager.

How do investment trusts work?

As listed companies, investments trusts are ‘closed ended’ that is there will only ever be a set number of shares to buy, irrespective of demand.

This is different to open ended funds which can cancel or create units in response to investor demand.

As such the price of a share in an investment trust will fluctuate according to demand. When lots of investors want to buy shares the price will increase above the value of its underlying assets. This is known as trading at a premium.

Conversely, when demand is low the trust’s share price falls below the value of its assets and it’s said to be trading at discount.

This means popular or ‘trendy’ trusts can become expensive and investors need to work out whether it’s worth paying over the odds to access that particular sector or fund manager. By the same token investors can scoop up a bargain buying an unloved trust, but must take care not pick up a dud.

Simon Crinage, head of investment trusts at JP Morgan says: “Investors should look at the history of an investment trust to see whether it has consistently traded at a discount to NAV or consistently traded at a premium to NAV. Investors should also research whether the board of the company has a stated ‘discount’ or ‘premium’ management policy in place.

He adds: “Investors shouldn’t be put off by a premium but they need to understand how sustainable the premium is. If a trust moved from a premium to a discount then an investor would essentially be receiving a lesser return because investors receive the share price return not the NAV return.”

Although this pricing structure might complicate matters for investors, it does buy its managers a number of strategic advantages.

For starters it enables them to invest in a more diverse array of assets including less liquid asset classes like private equity, commercial property and infrastructure.

This liquidity issue is important. If an investor in a trust wants their money back they simply sell the shares. However, in an open-ended fund if lots of investors wanted to sell their units, the fund manager may have to sell some of its holdings to do so and selling assets like commercial property often takes time. So as investment trust managers do not have to worry about holding liquid assets to cover redemptions they are better able to take a long-term view on potential investments.

Borrow to invest

Another feature of investment trusts is that they can borrow to invest – a process known as gearing.

Patrick Connolly, a certified financial planner at Chase De Vere explains: “They can borrow extra money to invest and this gives an added boost to returns if the underlying investments perform well.”

“This is why investment trusts usually outperform similar open-ended investment funds over the long term.”

However, while gearing can boost returns, investors must be aware that it also adds risk.

“If the underlying investments perform badly, then investors will have more money exposed to this bad performance and must pay interest on the money borrowed,” he adds.

What sort of investors do they suit?

An investment trust is worth considering by any investor with a long-term outlook – so at least five to 10 years.

The sheer number of trusts, each with their own aims and objectives, means there is a good chance of finding at least one to meet your needs.

Younger investors seeking to maximise growth may be drawn to a trust that focuses its attention on the emerging markets – riskier economies but with a higher potential for growth.

Others may seek investments in specialist areas such as commercial property.

Parents and grandparents often look to broad ranging global investment trusts to help them build a nest egg for their child or grandchild too.

But for many investors it will be the structure of the trust, rather than where it is invested that brings the appeal.

Generating income

Another quirk of trusts is their structure enables them to smooth returns, making them particularly appealing to those investors – like retirees – who are looking to generate an income from their investment.

Mr Crinage explains: “An investment trust has to pay 85% of the net income it receives during the course of the year. During good years it can put away up to 15% of what it earns for rainier days. This means there are a number of trusts which have an outstanding history of raising their dividends in both good years and bad years.”

The AIC’s Investment Trust Dividend Heroes (see table below) highlights those investment trusts that have been able to consecutively increase the dividend they pay investors each year for 20 years or more. This year’s list features 21 trusts with the top 10 all delivering a rising dividend for an impressive 40 consecutive years or more.

The top 10 includes three trusts in the UK Equity Income sector, with the City of London Investment Trust, the JP Morgan Claverhouse Investment Trust and Murray Income delivering a rising income for 51, 45 and 44 years respectively.

CompanyAIC sectorNumber of consecutive years dividend increasedDividend yield as at 28/02/18 (%)
City of London Investment TrustUK Equity Income514.2
Bankers Investment TrustGlobal512.2
Alliance TrustGlobal511.9
Caledonia InvestmentsGlobal502
F&C Global Smaller CompaniesGlobal471
Foreign & Colonial Investment TrustGlobal471.6
Brunner Investment TrustGlobal462.2
JPMorgan Claverhouse Investment TrustUK Equity Income453.6
Murray IncomeUK Equity Income444.3
Witan Investment TrustGlobal432.1
Scottish AmericanGlobal Equity Income383
Merchants TrustUK Equity Income355.2
Scottish Mortgage Investment TrustGlobal350.7
Scottish Investment TrustGlobal342.4
Temple BarUK Equity Income343.4
Value & IncomeUK Equity Income304.3
F&C Capital & IncomeUK Equity Income243.4
British & AmericanUK Equity Income2214.7
Schroder Income GrowthUK Equity Income224.1
Northern Investors Company*Private Equity2113.4
Invesco Income GrowthUK Equity Income204.1
*Please note Northern Investors Company is winding up.
Source: Association of Investment Companies (AIC)


Martin Bamford, managing director of IFA Informed Choice says: “They often appeal to more experienced investors who take an active interest in the management of the trust and its approach,” he says. “Investors should be comfortable with the closed-ended pricing features any use of gearing within the trust.”

He adds: “Like all investments, a trust can fall in value so investors need to have sufficient capacity for losses before making an investment.”

Making your choice

Deciding which is suitable for you will depend on your aims and objectives, as well as your attitude to risk – but whatever you choose you’ll need to do your homework.

Mr Bamford says: “Investors should look at the history of the investment trust to understand its performance and trading history, including whether current levels of discounts or premiums are typical or unusual.”

Annabel Brodie-Smith, communications director at the Association of Investment Companies says there is something for everyone: “We have everything from traditional global investment trusts to more exotic asset classes,” she says. “You just need to make sure you are happy with the investment risk being taken.”

In reply to by anonymous_stub (not verified)

Another advantage of IT's is that shareholders can get access to investing in companies in particular geographical areas, which are not quoted on the London exchange, and thus avoid the additional paperwork and expense of buying through overseas exchanges

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