Investment trusts step right back into fashion

With a change in regulations making these products increasingly popular, Rob Griffin looks at whether they would be right for you.

Investment trusts may soon enjoy an overdue surge in popularity thanks to regulatory changes that are due to come into force at the beginning of next year – but who should consider buying these particular products, and how likely are they to deliver decent returns?

The Retail Distribution Review aims to raise professional standards across the industry and provide greater clarity for consumers, but also tackle the risk that advisers' remuneration will bias their recommendations to clients.

It means independent financial advisers (IFAs) will be banned from receiving commission from the managers of open-ended investment companies and unit trusts – and as investment trusts haven't traditionally offered such incentives, this will allow them to compete more fairly, according to Carl Melvin, the managing director of Affluent Financial Planning.

"I expect the number of recommendations for investment trusts to grow when the commission bias is removed," he says. "The fact that IFAs that recommend unit trusts receive 3 per cent commission, as opposed to zero for a trust, will no longer prove to be a barrier."

They are already growing in popularity. In fact, assets under management in this area have almost doubled from £47.8bn at the end of December 2002 to £94.6bn by the end of September 2012, according to figures from the Association of Investment Companies.

So what are investment trusts and how do they work? Essentially they are companies with shares that are floated on the stock exchange. They are also known as closed-ended, which means they will only ever have a set number of shares available, according to Annabel Brodie-Smith of the Association of Investment Trust Companies.

"Their closed-ended structure allows managers to take a long-term view with their portfolios rather than having to deal with lots of redemptions when markets are tough," she explains.

In addition, there is the ability to gear, or borrow money – which has helped lift the performances of many trusts when markets have been in the ascendancy; the ability to deal in a variety of alternative assets; and the presence of an independent board of directors to look after shareholders' interests.

"A specific advantage when it comes to income is that trusts can retain income of up to 15 per cent every year, rather than having to distribute it like the open-ended sector," Ms Brodie-Smith adds. "This allows income smoothing when times are tough."

But opinions on investment trusts are mixed among advisers. Dennis Hall, of Yellowtail financial planning, is a fan and uses them to access particular asset classes. He also likes the fact that their structure can potentially give a smoother return to investors, especially those who want income.

"Private equity and infrastructure are both brilliantly served by investment trusts," Mr Hall says. "There are also a number of dividend-producing trusts that have maintained or increased dividends for decades, and right now clients really love income."

He also believes they are perfectly suited to "buy and hold" investors. "Their structure ring-fences the manager from the day-to-day market demands of investors wanting to buy and sell," he says. "People talk about gearing being the big worry, but they don't particularly gear a lot these days, so that's also a bit of a misnomer."

AWD Chase de Vere doesn't currently use investment trusts in its client portfolios, even though spokesman Patrick Connolly expects the introduction of RDR to create more interest in the asset class from next year.

"Investment trusts often carry greater risks than open-ended funds," he says. "They can move from a discount to a premium, meaning that the price you buy and sell at may be dictated by demand and supply for the trust, and this may differ from the underlying performance of assets."

He is also concerned about gearing. "It means they can have more money invested, which is likely to make investments more volatile, while they will also have to pay interest charges on the money they borrow," he explains. "Liquidity may be an issue as investment trusts cannot simply issue new shares to meet demand, whereas an open-ended fund can add or cancel units."

Geoff Penrice, a chartered financial planner at Astute Financial Management, also favours unit trusts/OEICs over investment trusts. "They are more straightforward and you know the unit price accurately reflects the assets in the fund," he says.

"As investment trusts are closed-ended and have the ability to borrow, they are more volatile than an equivalent unit trust, and more suited to clients who are willing to take a higher degree of risk."

Good managers bring consistent returns

We have asked advisers to suggest some investment trusts that could be worth a look.

Templeton Emerging Markets Investment Trust

The objective of this trust, which was launched in June 1989, is to invest in companies based primarily in emerging markets or deriving a significant amount of revenue from emerging markets, in the hope of delivering capital growth to shareholders over the long term.

Andy Gadd, head of research at Lighthouse Group, said: "It is managed by an experienced fund manager, backed by a large team. The charges are also reasonable with no 'hidden' performance fees, and gearing is strictly limited."

Witan Investment Trust

Witan's stated aim is to create wealth for its investors through stock-market investment and to grow the dividend in real terms, ahead of inflation. It has a multi-manager structure with exposure to a broad cross-section of both countries and sectors.

Geoff Penrice, a chartered financial planner at Astute Financial Management, said: "This trust has been running since 1909 and has continued to give good consistent returns."

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

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