Close-up on investment trusts

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Record levels of savings were ploughed into investment trusts on adviser platforms in the first half of 2017, according to the Association of Investment Companies (AIC). Advisers and wealth managers invested £514m on behalf of private investors — the highest recorded for the first six months of the year and 74% higher than the £296m of purchases in the first half of 2016.

Many savers won’t have come across investment trusts if they are used to investing in standard funds — especially if they have their savings with one of the 11 platforms that don’t offer access to them. Analysis by Comparetheplatform.com shows that 21 of the 32 platforms allow investors to purchase investment trusts (see table below).

Platforms with access to investment trustsPlatforms with no access to investment trusts
AJ Bell Youinvest
Alliance Trust
Barclays Smart Investor
Bestinvest
Cavendish Online
Charles Stanley Direct
Close Brothers
Club Finance
Equiniti Shareview
Fidelity
Halifax Share Dealing
Hargreaves Lansdown
Interactive Investor
iWeb
Selftrade
Strawberry Invest
TD Direct Investing
Telegraph Investor
The Share Centre
Trustnet Direct
Willis Owen
Aegon Retiready
Aviva Consumer Platform
Chelsea Financial
Financial Discounts Direct
Fundsnet
rPlan
Santander Investment Hub
Standard Life Self Investor
True Potential Investor
Vanguard

So what is an investment trust? What are some savers missing out on?

Investment trusts are different to other types of funds. They are effectively companies that hold assets such as shares and run by a fund manager who is backed by an independent board. The company itself is listed on the London Stock Exchange, which means that they can be bought and sold like other stocks and shares. While investment trusts predominantly invest in the shares of other companies, they can also invest in other financial assets.

The main difference between standard funds and investment trusts is that the former are open-ended funds meaning that when there are new investors the funds buy more of the assets they’re invseted in. However, investment trusts have a fixed number of shares in an issue, which is why they’re called closed-ended funds. Being closed-ended allows managers to take a longer-term view because they do not have to sell assets when investors sell their shares.

Investment trusts suit a number of different types of investors thanks to some of the unique features that set them aside from other types of funds.

Different types

Income seekers will be interested to know that investment trusts can hold back up to 15% of income generated by underlying assets each year to build up a reserve to be used to smooth dividend payments in tougher times. This means investors can enjoy a steady income, however markets are performing.

In certain circumstances, investment company boards may elect to pay income out of capital. While this can erode the long-term capital returns generated by the funds, many investors are happy to prioritise short-term income payments.

Growth investors might like another unusual feature which allows investment trusts to borrow. This means that if managers think there is value in a particular market, they can borrow money to use for further investments. This is known as “gearing” which can be high risk – but for potential big rewards.

Specialist products

In a rising market, returns from an investment trust can be magnified because gearing means managers are better able to take advantage of rising share prices. However, when share prices fall, the losses of geared funds can be exaggerated. Investment trusts can allow investors to get exposure to some specialist sectors which would otherwise be difficult for them to access through open-ended funds. More specialist investment trust options include funds that buy illiquid assets, such as infrastructure and private equity, where open-ended funds’ fluctuating size makes investment much less practical.

The pricing of investment trusts works in a unique way too. When the price is greater than the value of the assets held in the company, this is known as a premium. When the price is lower than the value of the assets, it is known as a discount.

Find out more on the different types of funds here.

Choosing funds

As well as looking at the performance of funds — while remembering this is no guarantee to future returns — investors might want to look at the Association of Investment Companies’ Dividend Heroes league table, which lists the 20 investment trusts with the longest track record of paying out more each year. You can find the 2017 list here.

According to Hargreaves Lansdown, the most popular trusts include City Of London Investment Trust, Edinburgh Investment Trust, Fidelity China Special Situations, Finsbury Growth & Income Trust, Foreign & Colonial Investment Trust, Murray International Trust, RIT Capital Partners, Scottish Mortgage Investment Trust, Witan Investment Trust and Woodford Patient Capital Trust.

One fund of note here is the Scottish Mortgage Investment Trust, which has performed so well of late, it was admitted to the FTSE 100 earlier this year.

 

Photo by Jeremy Bishop on Unsplash