Investment Trusts  

Why investment trusts are riding high

  • To understand the basics of investment trusts.
  • To be able to list the differences between investment trusts and open-ended funds.
  • To ascertain how to advise clients on investment trusts.
CPD
Approx.30min

1) Investment trusts are too complex. Investment trusts are best understood as funds, like Oeics, which can usually be purchased for less than their value of their assets (the discount). The AIC provides free training for advisers, both online and face-to-face, to help them improve their understanding. 

2) Investment trusts are highly geared. Just over half of investment trusts have no gearing at all; and the average gearing across all investment trusts is just 6 per cent (£6 of borrowing for every £100 of net assets). 

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3) Investment trusts are too risky. Because of discounts and gearing, the volatility of an investment trust can be greater than that of an equivalent Oeic.

This is why investment trusts should be considered long-term investments and used when better long-term performance is more important than minimising short-term ups and downs.

Some investment trusts have discount control policies in place to try to limit the volatility of the discount/premium. 

4) Investment trusts are cheaper/more expensive. It’s hard to generalise about fees and charges. Some investment trusts have very low costs, far lower than a typical open-ended fund. Other, more specialist trusts are more expensive.

Decisions need to be made on a case-by-case basis. It’s worth noting that over a third of investment trusts have reduced their management fees since RDR, and over 40 have abolished performance fees.

5) Investment trusts are illiquid. The largest quarter of investment trusts see well over £1m worth of shares traded every day, according to Winterflood Securities.

This should be ample liquidity for the vast majority of advised clients. Advisers worried about liquidity may want to avoid the very smallest investment companies, which are much less liquid.  

The barriers to advisers using investment trusts may be mostly due to habit, with open-ended funds appearing more familiar and easier to use.

However, with a little effort, it should be possible for advisers to master the differences between investment trusts and open-ended funds, to compare one vehicle with another, and select the most suitable in each case. If advisers shop around in this way, it can only be to the benefit of their clients. 

Nick Britton is head of training at the Association of Investment Companies

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to Mr Britton, what are investment trusts set up as?

  2. The board of an investment trust is independent of what, according to Mr Britton?

  3. What changes over time and reflects the popularity of the investment trust, among other things, says Mr Britton?

  4. What does Mr Britton call the 21 investment trusts who have raised dividends for each of the past 20 years?

  5. Which are the two platforms cited by Mr Britton as the only ones which do not give access to investment trusts?

  6. According to Mr Britton, barriers to advisers using investment trusts may be mostly due to what?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To understand the basics of investment trusts.
  • To be able to list the differences between investment trusts and open-ended funds.
  • To ascertain how to advise clients on investment trusts.

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