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.
Friday 26 October 2012
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."
- 1 Woman accidentally shoots herself in the head while posing for a selfie
- 2 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
- 3 Puerto Rico, island of lost dreams: People are leaving the debt-hit territory in droves as near neighbour Cuba's star rises
- 4 Female Muay Thai champion hustles coaches to give them a beating
- 5 16-year-old girl beaten and burned alive by lynch mob in Rio Bravo, Guatemala
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
Gay marriage 'Bert and Ernie' cake bakery found guilty of discrimination in Northern Ireland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
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