Sophisticated investors use them, as do new ones who haven’t got a clue. Their appeal is enduring – many are well over 100 years old – and their reach extends to every corner of the market. So what is it about investment trusts that makes them so popular and why, at the same time, have they been described as the stock market’s best-kept secret?
There are many reasons why investors in the know rely heavily on investment trusts and if we had to boil those reasons down to a single one, it would be that they have so much to offer.
Here’s a sample of what you get:
An investment trust is an instant portfolio, which gives you – even if you buy just a single share – exposure to a whole array of companies which are expected to be profitable going forward. If everything turns out right, in a few years you will be able to sell your shares for more money than you paid for them and in the meantime you might even enjoy a steady stream of income.
If you are just starting out, a large global trust gives you exposure to a broad basket of global equities. It’s an easy first choice which will make a solid core for your portfolio. You won’t have to worry about a disaster either as your trust will hold lots of shares so if one fails, it won’t make a huge difference.
Investment trusts give you access to someone else’s expertise and time. Investment trusts are – in essence – companies whole sole job it is to invest and grow your money. You, the investor, take a back seat while the manager of the investment trust carries out all the research and makes all the buying and selling decisions. Typically the trust manager will work with a team of analysts, while your interests as a shareholder/investor will be looked after by the board of directors. The structure is similar to ordinary companies hence the board of directors, and your holding will be bought in shares.
You can construct a complete portfolio using investment trusts as the building blocks with a solid core of global or UK trusts, and carrying on from there with say small companies, US companies, emerging markets, pharmaceuticals and so on.
Investment trusts enable you to invest without overpaying. By this we mean that you can quite often buy the shares at a discount to their real value, something we will look at in more detail later, and also because many trusts have share-buying schemes that allow you to benefit from ultra cheap dealing charges.
They have been around for a very long time so you can be sure they know what they are doing and that they work. They have a proven track record and many make it an aim to keep improving their returns to investors. Look at the table on page 10 – this shows some investment trusts which have increased their dividend payout to their shareholders every single year without a break for the past 20 years, and some trusts have managed to do so for much longer periods.
They often beat other types of managed funds – studies comparing performances suggest that because of their ability to borrow money and their efficient structure, they are likely to deliver bigger returns to investors.
Other good reasons for buying investment trusts include how easy it is to gain access to far-flung markets. All in all, if you are thinking of investing, a good way to start is through an investment trust.
But if they have so much to offer, why then are they sometimes referred to as a ‘secret’? That’s simply because in the past financial advisers were paid commission when they sold unit trusts to their clients and as a result they rarely recommended investment trusts. Advisers also insisted there was another reason for their slowness to promote investment trusts: that because of the different structures of unit trusts and investment trusts, the latter involved more risk.
Over the following pages, we look in detail at how investment trusts work, how they compare to similar types of pooled investments, how to buy them and finally what investment trusts with very different aims and focuses can offer you.