8th March 2013

A renaissance period for investment trusts

Investment trusts have had to exist in the shadow of unit trusts for the past few decades. But in rising markets investment trusts generally outperform other funds and can deliver more stable, growing income streams.

Superior performance records
Investment trusts are in a renaissance period and are coming up on the radar of more people, far more than five to ten years ago. There is a lot more attention on the superior performance records of these trusts versus their equivalent open-ended funds.

Investment trusts can play a useful role in your investment line-up. They were born in 1868, are closed-end products listed on the London Stock Exchange and unlike their more popular rival, unit trusts, they have a fixed number of shares in circulation.

Broader economic market
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 called trading at a ‘discount’, while the opposite scenario of the shares being higher than the asset value means you’re trading them at a ‘premium’.

Increase your returns
In contrast to other types of fund, investment trusts can borrow money to boost investment. This is known as ‘gearing’. Although gearing can increase 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 in which investment trusts have managed to beat their unit trust peers.

Aside from higher returns over the long term, investment trusts can provide a more stable, growing income. 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.

Shopping and finding a bargain
The opportunity to buy a trust at discount is like shopping and finding a bargain you know is worth more than the price. But if you’re concerned 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, which is a good thing, to ensure there are not discounts of 40-50 per cent.

Trading at a premium
On the flipside, if a trust is trading at a premium, it does not mean it’s worth writing off. You need to look at your time horizon. It’s less of an issue if you’re invested for ten 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, and this should help to increase their popularity.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Leave a Reply

Your email address will not be published. Required fields are marked *