BLOG: Investment trusts are one of the industry’s best-kept secrets

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Written by: Darius McDermott
28/10/2019
Having been around for more than 150 years, investment trusts have often been considered one of the best-kept secrets in the investment industry, writes Darius McDermott. 
BLOG: Investment trusts are one of the industry’s best-kept secrets

An investment trust, at its rawest form, is another pooled investment, like a unit trust or open-ended investment company (Oeic). However, unlike the others, an investment trust is a quoted company and listed on the Stock Exchange.

Like many funds, investment trusts can also invest across various themes and geographies, but the critical difference between them and the likes of unit trusts and Oeics is they are closed-ended. This means if you try to buy a trust’s shares after it launches you can only do so if an existing investor wants to sell theirs.

Contrast this with a unit trust or Oeic, where the manager makes it possible to invest by creating new units and then invests this new money. However, when investors want to sell in an open-ended fund, a manager may have to sell an investment(s) in order to meet redemptions. When you sell shares of a trust, the manager doesn’t have to sell any assets, but you have to find someone to buy the shares from you.

Other key differences

As an investment trust is a company, market sentiment can also dictate its share price. This may move above or below the value of the assets, known as the Net Asset Value (NAV). When it is above those assets it trades at a premium, while below means it is a trading at a discount. However, sentiment is not always correct, so if a trust is trading at a discount, it could actually a bargain, while one at a premium could easily be overpriced.

Investment trusts can also borrow money to invest more. This is known as gearing, and is often used when a manager is positive about a certain stock or sector. If that stock or sector rises in value it can boost returns for the trust, but should they fall, it can easily make the losses greater.

Investment trusts also appoint independent boards, which have the power to replace managers if they underperform or steer away form the mandate.

Below are three investment trusts serving different needs to investors.

A solid income investment – City of London Investment Trust

Dividends are integral to healthy long-term returns and can also be a useful source of income. So investors may like to consider a trust offering dependable dividend payments.

Launched in 1891, the City of London Investment Trust is one of the longest-running investment trusts in the UK. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 53 years.

Manager Job Curtis aims to provide shareholders with dividends that are between 10% and 30% higher than the average for the UK equity market. The trust has produced a total return of 173.3% to investors over the past 10 years, compared with 113.6% for the UK stock market.

Investing overseas – Baillie Gifford Japan Trust

Overseas investment trusts offer investors more exotic sources of return and can also act as counterweights to UK-centric risks.

The Baillie Gifford Japan Trust aims to provide capital growth by predominantly investing in small and medium-sized companies in the region. This is a well-managed trust with a clear investment process. Run by an experienced team, headed by Matthew Brett, it usually holds between 40-70 stocks. It has returned 413.2% to investors in the past 10 years, compared with 137.5% for the Japanese stock market.

Alternatives: TR Property Investment Trust

The term ‘alternative’ is used to describe many other types of investment outside of equities and bonds. Accessing them through a closed-ended structure like an investment trust can lower the impact of liquidity risk.

A good starting point is a vehicle like the TR Property Investment Trust, which invests in the shares of property companies of all sizes, typically within Europe and the UK. It will also have a small amount invested in physical property in the UK. Manager Marcus Phayre-Mudge looks for well-run businesses in sectors including retail, office, residential and industrial property. It has returned 269.9% to investors in the past 10 years compared with 145.6% for its benchmark.

Darius McDermott is managing director of FundCalibre

 

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