Investment trusts are back in the limelight

Previously overshadowed by unit trusts, they are now flourishing and advisers are more likely to recommend them

Investment trusts have had to exist in the shadows of the more heavily sold unit trusts for the past few decades. They were castigated as an investment that was antiquated and prone to sharp moves in performance.

But as markets have enjoyed a bumper 2012 and early 2013, many reckon investment trusts are on the way back. Indeed, JPMorgan recently announced of its 10 biggest fund purchases this month an unprecedented six are investment trusts.

Not only do they generally outperform funds when markets are on the rise, but investment trusts can deliver more stable, growing income streams, say their supporters.

And new regulations that have just kicked in mean independent financial advisers will be more likely to recommend them to their clients. In the past, advisers have pocketed commission for selling unit trust funds, but not investment trusts. The Retail Distribution Review, which came into force at the turn of the year, puts an end to commission in most cases, meaning a whole raft of products, including investment trusts, are coming your way.

"Investment trusts are in a renaissance period and are coming up on the radar of more people, far more than five to 10 years ago," says Simon Elliott at broker firm Winterflood Securities. "There is a lot more attention on the superior performance records of these trusts versus their equivalent open-ended funds."

But it wasn't that long ago that investment trusts were easily shunned for being "too complicated" or risky because of their "gearing" or "discounts". Although these terms may seem alien aspects that you don't have to bother with when buying the more prolific open-ended fund, it's certainly worth taking a little time to understand the pros and cons of trusts, as they can play a useful role in your investment line-up.

Investment trusts, which were born in 1868, are closed-end products listed on the London Stock Exchange. Unlike their more popular rival unit trusts, they have a fixed number of shares in circulation.

You can buy these shares when the trust is first launched in the offer period, or you can trade them on the stock market. Although a trust's share price generally moves in line with the value of its investments, the price can be affected by a range of factors, such as demand from investors and the situation in the broader economic market.

Buying or selling shares when the price is below the value of the trust's assets is at a "discount", while the opposite scenario of the shares being higher than the asset value means you're trading them at a premium. In contrast to other types of fund, investment trusts can borrow money to boost investment. This is known as gearing. Although gearing can turbo-charge your returns when markets are on the up, it can exacerbate your losses if markets are falling. The more gearing the trust has, the more likely your gains, or losses, will be magnified.

Gearing is one of the ways investment trusts have managed to beat their unit trust peers. "Investment trusts tend to outperform when markets rise," says Mr Elliott. "They're a good bull market product. And gearing is one aspect of that."

Over a three-year period, the average investment trust turned a £100 lump sum into £123, while an unit trust fund would have delivered £115. Over a 10-year period, an investment trust would have returned £288 while an unit trust fund would only return £213, according to the Association of Investment Companies.

Aside from higher returns over the long term, investment trusts can provide a more stable, growing income. Some trusts have been able to increase their dividend payments for almost 50 consecutive years, which is impressive given a number of companies slashed payments a few years ago. The City of London Investment Trust, for example, has increased its dividend for 46 years in a row. Whereas unit trusts tend to invest in equities or bonds, investment trusts have the ability to tap harder-to-access areas such as private equity.

"The case for investment trusts is strong in more niche areas like infrastructure or physical property," says Jason Hollands at Bestinvest. "Investment trusts make sense in these cases, where unit trusts can't really hold these asset classes." While more obscure areas like infrastructure are arguably riskier than stocks or bonds, holding a portion can help diversify your investment portfolio.

Mr Hollands tips the John Laing Infrastructure trust for income, which has a dividend of around 5.5 per cent, higher than many bonds. "Investment trusts can be a one-stop shop for children's savings schemes," he added.

The opportunity to buy a trust at discount is akin to shopping and finding a bargain you know is worth more than the price. But if you're worried about the price fluctuating or the discount widening even further, trusts tend to have "control mechanisms" in place. "Historically most investment trusts have traded at a discount and often traded at high discounts. Now, many have a discount control mechanism where the board can buy back the shares," says Mr Hollands. "It's a good thing, to ensure there are not discounts of 40-50 per cent. But it's nice to buy on a discount, if there's belief that it could narrow."

On the other side of the coin, if a trust is trading at a premium, it does not mean it's worth writing off. "I think there's more to a premium. You have to ask why is this the case," says Mick Gilligan at stockbroker Killik & Co. "What are the chances this will be maintained? And you also need to look at your time horizon. It's less of an issue if you're invested for 10 years with a quality manager."

Investment trusts have tended to have lower charges, which can help to boost your gains over the long term. "A major benefit of investment trusts is that they are usually cheaper than open-ended funds," says Patrick Connolly of AWD Chase de Vere. "This should help to increase their popularity as financial advisers and investors should be focusing more on overall investment charges."

Emma Dunkley is a reporter for citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
people
News
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
News
politicsIs David Cameron trying to prove he's down with the kids?
News
Dominique Alderweireld, also known as Dodo de Saumure, is the owner of a string of brothels in Belgium
newsPhilip Sweeney gets the inside track on France's trial of the year
PROMOTED VIDEO
News
Cumberbatch was speaking on US television when he made the comment (Getty)
people
Life and Style
tech
Arts and Entertainment
Tom DeLonge, Travis Barker and Mark Hoppus of Blink-182 pictured in 2011.
musicBassist Mark Hoppus and drummer Travis Barker say Tom Delonge is 'disrespectful and ungrateful'
Sport
football
Arts and Entertainment
Olivia Colman and David Tennant star in 'Broadchurch'
tvBroadchurch series 2, episode 4, review - contains spoilers
Sport
cyclingDisgraced cycling star says people will soon forgive his actions
News
Britain's Prince Philip attends a Garden Party at Buckingham Palace in London
people
Arts and Entertainment
Ed Sheeran will play three sell-out gigs at Wembley Stadium in July
music
News
i100
News
Lena Dunham posing for an official portrait at Sundance 2015
people
Arts and Entertainment
Under the skin: Sarah Kane in May 1998
theatreThe story behind a new season of Sarah Kane plays
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Day In a Page

    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea