Investment trusts are back in the limelight
Previously overshadowed by unit trusts, they are now flourishing and advisers are more likely to recommend them
Sunday 20 January 2013
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
Debt in Britain: Numbers seeking help on how to cope with mounting bills goes up by more than half in three years
General election 2015: David Cameron's promise brings uncertainty to investors
Have a happy new financial year
Simon Read: 'It went below the radar but you could be eligible for a tax break on your savings'
Women to lose benefits from contracted-out pension scheme
- 1 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 2 Google April Fools': company unveils backwards search engine and huggable digital assistant
- 3 I might be an MP, but that doesn't stop me fighting sexism with my breasts
- 4 April Fools' Day 2015: The best hoax news stories from around the internet
- 5 Gamers confess the worst things they've done in The Sims
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
Revealed: Putin's army of pro-Kremlin bloggers
Katie Hopkins reported to the police for race hatred by Labour MP Simon Danczuk after tweet about Pakistani men
iJobs Money & Business
£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...
£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
Day In a Page
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000