What is an investment trust and what are the benefits?

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 some investment trusts is the option to borrow money 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 arrangements for borrowing money. 

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 a discount (or a premium) to the sum of its parts – also known as net asset value (NAV).. 

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. Investors should also be wary of a trust trading at a premium as it could imply strong sentiment that might erode over time and weigh on returns. 

Investment trust options through Charles Stanley Direct

Unlike some of our competitors, we include investment trusts on our list of preferred investment for new investment – the Charles Stanley Direct Preferred List. This is to provide a breadth of choice for our clients and to acknowledge the advantages they can have.  

However, where investors look to opt for an investment trust in their portfolio it should be noted that they can exhibit greater price fluctuations than equivalent investment funds such as unit trusts. This is because of the impact of any gearing, as explained above, as well as changing investor sentiment increasing or reducing demand for shares in the market. 

The investment trusts currently on the list are: 

• Aberforth Smaller Companies
• Allianz Technology Trust
• Baillie Gifford Japan
• BlackRock Frontier Markets
• BlackRock Smaller Companies
• Fidelity Asian Values
• Pantheon International
• Personal Assets
• RIT Capital
• Ruffer
• Schroder Asian Total Return
• Scottish Mortgage
• Smithson
• Templeton Emerging Markets
• Worldwide Healthcare Trust

Want to learn more? Follow the link to find out how to choose an investment trust.

How to invest in investment trusts

Investment trusts are bought and sold as individual shares on the stock market, so you can buy them in an investment account or within a Stocks & Shares ISA or Self Invested Personal Pension (SIPP). Once you have opened the right account for your needs, search for the investment trust you wish to buy and place an order to purchase it.  

You should note that all investment trust purchases and sales are subject to share trading charges. 

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