BLOG: Three myths about investment trusts – and why you shouldn’t believe them

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Written by:
18/08/2014
Thanks to the Retail Distribution Review (RDR) investment trusts are back in the spotlight, but so too are the myths that surround them. Simon White debunks the most persistent.
BLOG: Three myths about investment trusts – and why you shouldn’t believe them

The last 12 months or so have seen renewed interest in investment trusts, largely down to widespread changes to financial rules as part of the RDR.

These changes were rolled out in 2013 and forced independent financial advisers to consider investments across the whole of the market. This has been great news for investment trusts – investments which like unit trusts invest in an array of assets to achieve a specific objective, only they trade on the stock exchange. But the rollout of the RDR has been even better news for ordinary savers. This is because, increasingly, their attention is being drawn to a range of investments run with their best interests in mind.
Debunking myths

Unfortunately, while the investment trusts sector is seeing renewed interest, the myths that surround using them are still being talked about .

These myths need to be swept away if interest in investment trusts is to pick up any further. Here, we’ll deal with each myth one by one.

Myth one: investment trusts are complicated

The investment trust structure is not as difficult to understand as some people may think. Investment trusts are simply companies savers can access by buying their shares.

Myth two: investment trusts are costly

Investment trusts are not expensive, and in fact the way they are run helps to keep costs in check. Investment trusts are managed like other companies that trade on the stock exchange. They are overseen by a chairman and an independent board that is fully accountable to shareholders. This means performance, costs and the fund manager are all under constant scrutiny.

Myth three: it’s tough to blend investment trusts into portfolios

While many global markets can be accessed through investment trusts, trusts really come into their own when used to access niche and less frequently traded assets. It is important to remember that, as with any investment, investment trusts are not risk-free and in many cases the more specialised the assets they invest in, the greater the risk of capital loss.

However a further benefit of investment trusts is that their managers can invest for the longer term without worrying about liquidity and managing redemptions. Although this sounds quite complex, this simply means managers do not have to sell their investments when investors decide to leave the trust. Because investment trusts trade on the stock exchange, the onus is effectively on the seller to find a buyer.

This is not the case for open-ended funds (such as a unit trusts) where if an investor sells the investment those units are bought back by the investment manager, and if he does not have enough cash readily available in order to do this assets in the unit trust can be sold. Managers try to avoid this by building a cash buffer into the fund. However, this in turn limits the scope of how the money can be invested as it may need to be readily accessible if lots investors decide to exit.

Simon White is head of investment trusts at BlackRock. 

We remind investors that the value of your investment and income from it will vary and your initial investment cannot be guaranteed. We strongly recommend you seek financial advice prior to investing.

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