Why Investment Trusts?

While investment trusts have delivered excellent long-term returns for their shareholders for over 150 years, they are still often referred to as “The City’s best-kept secret”

Four key reasons

Better performance

Despite not being well known, investment trusts on average possess a superior performance record when compared to their better-known cousins - unit trusts and OEICs.

Furthermore, investment trusts have beaten most of the market indices whether delineated by region or country – unlike unit trusts, OEICs and ETFs.

Part of the reason is they charge lower fees. Another reason is that, like other public companies, trusts can borrow to buy more assets. Historically, this has benefitted asset values and share prices in part because markets have risen and because good fund managers have capitalised on this gearing.

Record of Outperformance

Better structure

Unlike unit trusts or OEICs, investment trusts are ‘closed-ended’ - they have a fixed number of shares like other closed-ended public companies such as M&S and BP, but instead of specialising in clothes or oil, they specialise in financial assets.

Accordingly, the managers of investment trusts can take a long-term view of their assets as they are not subject to the same relentless flow of monies, both being introduced and withdrawn, as are open-ended funds. Investing for the long-term tends to result in better returns.

Being closed-ended, investment trusts are also better suited for certain types of investment – particularly those less-liquid such as commercial property, as highlighted by the closure of a number of open-ended property funds during the mistaken rush to the door following the EU referendum

Other less-liquid assets such as private equity or smaller companies require a similar approach. Their very nature and therefore at times illiquidity require the incubator effect best offered by the closed-ended structure of investment trusts.

Income friendly

Unlike unit trusts, investment trusts can retain a percentage of their dividends and income received from holdings in the underlying portfolio, in any one year. This ‘surplus cash’ is called the Revenue Reserve.

This reserve can be used to supplement dividends going forward to help ensure a smooth progression even when, within reason, the underlying economy and/or markets go through a rough patch and portfolio holdings see dividend cuts.

This ability is important to those investors seeking income – understanding the extent of reserves is a key factor when selecting relevant investment trusts.

Furthermore, legislative changes allow investment trusts to dip into their capital to supplement or pay a dividend. More trusts are doing this which, within reason, is welcome as it better allows income investors to gain exposure to low-yielding but high-growth sectors.

Aligned interests

Investment trusts tend to display greater transparency in the interests of their shareholders. Like other public companies, investment trusts have an independent board of directors whose brief is to represent shareholders - and these directors have teeth!

Shareholders themselves have significant powers. They can vote on issues such as changes to investment policy and the appointment of directors. They can attend shareholder meetings and ask questions about the running of the trust – it is, after all, their company.

This leads to a much more transparent environment. It is difficult for investment trusts to hide in the shadows because of mediocre performance, certainly when compared to lacklustre unit trusts. They are on notice – reward shareholders or questions will be asked. This is one reason the industry continues to evolve in response to shareholders’ investment requirements.

The Association of Investment Companies (AIC), the industry’s well-respected trade body, is also on the side of shareholders and has done sterling work in recent years to raise awareness and better inform and educate.

Baron & Grant is harnessing the advantages of investment trusts to the benefit of their clients

The company is also seeking, with the help of others, to ​help​​ investors generally better understand how investment trusts can achieve financial objectives

Find out more