The first investment trust (IT) was the Foreign & Colonial Investment Trust, set up all the way back in 1868. They are a type of collective investment and operate in a similar way to funds, giving investors more opportunities to diversify their portfolio. Here’s the low-down on investment trusts and how you can access these opportunities.
Five benefits of investment trusts
1. Diversify your portfolio
Investment trusts are a type of collective investment, much like a unit trust - allowing you to spread risk across dozens of different companies. Investors’ money is pooled together and run by a manager who buys and sells stocks and shares on their behalf to create a diverse portfolio.
While unit trusts and OEICs are structured as ‘open-ended’ funds, investment trusts are ‘closed-ended’. With open-ended funds, a fund manager creates units for new investors and cancels them when money is taken out. Therefore the fund grows larger as more people invest, and shrinks as they cash in. An investment trust, meanwhile, has a fixed number of shares which investors can buy and sell on the stock market. It is ‘closed-ended’ in the sense that when investors buy or sell the shares the Trust’s assets don’t change.
2. Access hard to reach markets
Investment trusts are sometimes overlooked, but they can have some important advantages. Having a fixed number of shares means there is no need to buy or sell assets to keep up with the changing demand of investors. This can allow a fund manager to be more fully invested as there is no need to keep some cash in reserve to meet redemptions.
It also means that investment trusts can be more appropriate vehicles to access more esoteric, ‘illiquid’ assets that cannot be traded easily, such as commercial property, infrastructure projects, frontier markets or private companies. Having a fixed pool of assets means that there is usually much less need to engage in lengthy or expensive buying and selling to meet investor demand.
3. Boost your investment returns
Another important benefit of investment trusts is the option to borrow to invest, also known as ‘gearing’. This generally increases the volatility of a trust’s asset value – and share price – which can mean a boost to returns in a rising market. However, the opposite is generally the case in a falling market and, if not carefully managed, a Trust can become burdened with expensive borrowing arrangements.
That’s especially relevant at present as interest rates have risen a lot over the past year. Trusts with significant variable interest rate credit lines, or those that are needing to arrange fresh borrowing due to existing agreements expiring, are paying more on their debt.
4. Smooth out income
For income seekers, a further defining characteristic of investment trusts is the ability to retain income generated by its underlying assets. This can help smooth dividend payments to investors. For instance, in a recession when lots of dividend cuts take place a Trust can use any reserves to maintain or even grow its payments. This is appealing to investors who rely on the income their investments generate.
5. Get discount opportunities
Finally, investment trusts can sometimes offer opportunities to take advantage of depressed investor sentiment. As the share price is determined by supply and demand the market value of the Trust’s assets doesn’t necessarily equate to its valuation – it can trade at less than the sum of its parts (a discount) or more (a premium).
Savvy investors can potentially take advantage by buying into a pool of assets below their true worth if, for instance, they are investing in unfashionable areas. However, there are no guarantees any discount will narrow and investment performance is likely to be a more important factor in overall returns.
How you can invest in investment trusts
Investing in investment trusts involves buying shares, which can be done at any time during market hours. Unlike some of our competitors, we include investment trusts on our list of preferred investment for new investment – the Charles Stanley Preferred List. This is to provide a breadth of choice for our clients and to acknowledge the advantages they can have. However, it should also be noted that they can exhibit greater price fluctuations than an equivalent unit trust or OEIC fund because of the impact of any gearing, as explained above, as well as changing investor sentiment increasing or reducing demand.
- Aberforth Smaller Companies
- Allianz Technology Trust
- Baillie Gifford Japan
- BlackRock Frontier Markets
- BlackRock Smaller Companies
- Fidelity Asian Values
- Pantheon International
- Personal Assets
- RIT Capital
- Schroder Asian Total Return
- Scottish Mortgage
- Templeton Emerging Markets
- Worldwide Healthcare Trust
Need more support? Follow the link to find out how to choose an investment trust.
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Looking for investment ideas? Explore our Preferred List for a curated list of funds and trusts that are overseen by experts.See more