Investment trusts – savings vehicles invented in the Victorian era – are regarded as one of the City’s best-kept secrets.
For many seasoned investors and regular readers, investment trusts have formed the bedrock of their portfolios for decades. Some private investors stick solely to trusts – and with good reason given the structural advantages they have over open-ended funds, such as the ability to gear and to hold money back for a rainy day through the use of revenue reserves.
Another key benefit is that a fixed number of shares is issued (hence the term 'closed-ended'), raising a fixed amount of money for the manager to invest in a portfolio of assets. The shares are then traded on the stock market. The share price goes up and down according to investor demand and supply, but the fund manager is not impacted by shareholder sentiment.
In contrast, in the case of the open-ended funds, the fund manager has continually to juggle with inflows and outflows, in other words investing new money when it enters the fund and freeing up cash when investors ask for their money back.
The cheapest places to buy investment trusts
For investors who want to hold only investment trusts, it is essential to do some research as to platform costs, because online brokers’ charges vary and the differences can be significant.
Thankfully, help is at hand, as the Association of Investment Companies has tasked the lang cat, a consultancy specialising in online brokers, to identify the most cost-effective platforms for holding and trading investment company shares.
Annual costs for a range of different portfolio values are stated in percentage terms for 26 online brokers in the colour-coded table below. Be aware that some brokers, including our sister company Interactive Investor, charge a fixed fee rather than a percentage of your overall portfolio, but for the purposes of this exercise each broker’s charges have been displayed in percentage form.
In the case of funds, the usual rule of thumb is that for small pots percentage charging is more cost-effective. The dynamics, however, start to change for pot sizes of £50,000 or more, as from then onwards fixed fees come into their own in terms of lower costs.
For investment trusts, though, it is a somewhat different story, as many percentage-charging providers cap their ongoing broker charge beyond a certain value.
For example Hargreaves Lansdown, Britain’s biggest broker, charges its customers 0.45% a year, but for investment trusts annual charges are capped at £45 in an Isa and £200 in a self-invested personal pension. Isa investors with a pot size of £100,000 who buy open-ended funds therefore pay £450 a year, whereas in contrast those who purchase investment trusts are billed £45.
The table shows the cheapest options for various pot sizes are highlighted in green, whereas those deemed expensive have been coloured in red. The table below assumes four trades (buy or sell) are made per year.
Steve Nelson, head of research at the lang cat, points out that for the cost-conscious investor there are significant savings to be made by shopping around.
"Many providers cap their ongoing platform charge (and some don’t charge for custody at all) if you invest outside of mainstream open-ended funds."
He adds: "But of course, price is only one aspect of platform selection. How much help you need choosing investments, how much importance you attach to online functionality and how much you value a big brand name are some of the other things you may want to think about."
This article was written for our sister magazine Money Observer.