The benefits of investment trusts

Running through some of the top benefits of investing...in investment trusts.

Article updated: 4 December 2018 9:00am Author: Alice Rigby

Every little helps

As a non-professional investor, it is easy to feel like a small cog in a very big machine. But, the investment trust structure goes some way to alleviating this – and with several of the big issues facing investors at the moment helped to some degree by shareholder engagement, now more than ever investment trusts could be a good port of call.

Pensions freedoms

With pensions freedoms, which allow investors to move their pension money relatively freely between assets, now firmly in place, the trade-off between the flexibility of investment and the reliability of annuities is becoming more widely understood. At the same time, traditional sources of income have proved less reliable than in the past during this economic cycle.

Because of their ability to take a share of profits to build up revenue reserves, investment trusts have a unique income-generating advantage. They are able to ‘smooth’ income distributions, so that these remain steady – through good times and bad, as we’ve discussed in the past. And, if a board fails to sufficiently protect investors’ income, with the ability to change the non-executive board members, investors have the recourse to make their voices heard. In this sense at least, investment trust investors have had their cake, and eaten it too.

Fairness

With the financial crisis now in the rearview mirror, banker bashing has fallen slightly out of fashion. Nonetheless, the long-term legacy of that period is that we are all a lot more conscious of what we do with our money, and want to see it run for our benefit.

By giving investors the ability to vote on key issues related to trust management, investment trusts give them more influence on how their money is run. Ultimately, this say can extend as far as changing the mandate of the trust – or changing its manager. While this process remains unusual, and can be challenging, it is a reassuring backstop for investors.

However, for individuals looking to take a less drastic course of action, there is another benefit to the trust structure. As a publicly-listed stock, it can be traded like any other. This includes walking away from the fund without having to pay exit fees. Instead, the only financial consideration at the point of redemption is the share price.

Variety

Over the last ten years, as bonds have languished in the doldrums of historically-low yields, the hunt for income has been on. For professional investors in particular, this has led them down some interesting paths. Sectors such as mid-cap direct lending and asset leasing have ballooned, as institutions have turned to them to fuel income.

While in an open-ended structure many of these asset classes would be shut off to non-professional investors, the liquidity of investment trusts has allowed them to flourish in this space. Examples of these include Greencoat UK Wind and Standard Life Private Equity, which both invest in asset classes not typically accessible to the man or woman on the street.

The ethical wave

Another rising trend in investment is the increasing understanding of the role that investors could play in ensuring that capitalism becomes fairer. Fund managers are increasingly encouraged to engage with the companies that they invest in, supporting better practices, which in turn research suggests can lead to better returns. As some of the longest-term investors in the business – thanks to a fixed capital structure that allows them to remain invested in the face of redemptions – investment trusts are perfectly poised for the engagement revolution.

Bonus points

While any investment decision should be considered in the context of a broad range of parameters, including risk appetite and investment goals, considering the structure of an investment is also important. For some of the key concerns facing investors, investment trusts could be ideally placed to meet investors’ needs.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Alice Rigby

Marketing Manager, Kepler Partners

Alice manages the production and distribution of content at Kepler Trust Intelligence, an online research hub for professional and private investors. She was previously a financial journalist at Investment Week and an investment writer at Hermes Investment Management.

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