Investment trusts have been in existence for nearly as long as the London underground – almost 150 years, but have grown in popularity lately due to the flexibility they offer in terms of access to various sectors and geographies in order to diversify a portfolio.
As closed-ended funds, they work like any other company where investors buy shares. The money raised is reinvested by the trust and if the underlying investments do well, the share price of the investment trust rises.
Some advisers believe investment trusts to be sophisticated or expensive compared to their open-ended equivalents. But the RDR’s abolition of commission payments and increased access to investment trusts through platforms have removed some obstacles to growth. But has this inspired any significant change in investor sentiment?
“Investment trusts have been well placed to benefit from the recent changes to pensions and increasing demand for income as they have the ability to retain up to 15 per cent income each year, which enables them to distribute a more consistent income stream to investors over time,” says Jonny Rusbridge, investment manager at Devon-based Seabrook Clark. “Furthermore, we have noticed that some investment trusts now tend to pay out dividends on a quarterly basis, which is attractive to investors from a cashflow point of view.”
Mr Rusbridge also points out that in 2015, the majority of investment trust initial public offerings (IPOs) have involved strategies which invest in illiquid assets. “One example is Woodford’s Patient Capital Trust, launched in April, which invests in early-stage and early-growth companies,” he said.
Advisers encourage their clients to invest in investment trusts for a variety of reasons. “The investment trust sector is performing really well and on a like-for-like basis, if we look at the unit trust sector, the performance is much superior in investment trusts,” says Minesh Patel, a chartered financial planner at London-based EA Financial Solutions. “The costs are a lot less and second, because it is a closed mandate, they can offer a lot more discipline.”
Growing trends
While the investment trust sector has seen some growth in popularity, other interesting trends have come to light in the past few years. Tim Mitchell, head of investment trust sales at JP Morgan Asset Management says investing in alternatives is the biggest trend at the moment, especially relating to new issues.
Mr Mitchell says “That means investing not in the traditional asset classes – equities and bonds – but more in things such as infrastructure, and wind farms and solar parks. Today I saw one of the leasing funds has done a secondary issue. There have been mortgage-backed products as well.”
He further explains that investing in alternative strategies pays decent levels of predictable and frequent income since these assets behave differently to equities and bonds and an increasing number of wealth managers are looking to get more into their portfolio.
“There are only so many alternative assets out there, but I think what is interesting about the investment company sector is its ability to reinvent itself and to utilise the structure of a closed-ended fund with a corporate body structure,” Mr Mitchell says. “It means that it is very flexible, and it can invest in all sorts of things that, frankly, more traditional open-ended fund structures can’t.”
