Investment trusts have been around since the 1860s and right now, an awful lot of them look like long-term bargains.
Investment trusts are public limited companies (PLCs) that are listed on the London Stock Exchange. Their sole business is to invest on behalf of their shareholders.
Typically, we hold investment trusts within our bespoke portfolio service, which gives you access to a broad universe of investment assets.
Investment trusts are sometimes overlooked, but they can have some important advantages over the long term.
Generally cheaper
Investment trusts have long been committed to low costs and tend to have lower total expense ratios than open-ended funds such as unit trusts.
Access hard to reach assets
We particularly like investment trusts as their unique structure allows us to access a wider range of assets such as renewable infrastructure and private companies.
An investment trust has a fixed number of shares to buy (a closed-end fund), and fund managers do not have to buy and sell shares to meet demand. This gives the fund manager more control as they can buy and sell when they believe the time is right.
Borrowing power
By borrowing money (a process known as ‘gearing’), investment trusts can potentially boost returns, though it can also magnify losses as interest rates rise.
Trust structure
The value of your investment is based on the share price of the investment trust, not necessarily the value of the underlying assets.
Depending on these factors, an investment trust’s share price could trade above the underlying value of the portfolio (at a premium), or below the underlying value of the portfolio (at a discount).
Unfortunately, some of the advantages of the investment trust structure can work in reverse.
A year to forget
Last year was a tough one for investment trusts. The average trust shouldered a double-digit discount – the first time this has happened since the global financial crisis.
Of the 392 trusts listed on the Association of Investment Companies website, around 220 lost money. In around a quarter of those cases, however, the trust’s share price has fallen despite its manager achieving growth in the value of its underlying investments.
Investment trusts are also grappling with some structural issues. A consolidating wealth management industry increasingly favours bigger, more liquid trusts, at the expense of the smaller players in the sector.
Discounts persist – but so do opportunities
Rising interest rates in the sector has led investors to ask for higher returns and dividends than have been incorporated in the asset values of the funds, which has contributed to the emergence of sector share price discounts. However, we view this as a substantial long-term opportunity.
Despite the negative sentiment and difficult backdrop, earnings and revenue growth are generally remaining resilient in underlying portfolios.
Trusts on the path to net zero
Climate change is showing signs of accelerating and demand for portfolios of existing cash-generating renewable and infrastructure assets is likely to remain robust.
