Investment trusts have been around for a very long time – but many investors remain confused as to how they actually work. Here we look at the benefits of trusts, explain how they’re managed, and consider the roles they can play in someone’s overall portfolio.
What are investment trusts
Let’s start with a quick overview. Investment trusts – also known as investment companies – are listed and traded on the London Stock Market in the same way as the shares of corporate giants. However, they are actually a type of fund in which investors’ money is pooled and put to work in various ways, in line with the trust’s overall objectives. They are run by dedicated managers and benefit from a variety of investment tools, including the ability to smooth out returns over time. We’ll take a closer look at those shortly.
How are they structured?
Investment companies are referred to as being ‘closed-ended’, which means they have a fixed number of shares in issue at any one time. Therefore, when demand is strong, the share price will exceed the valuation of the underlying assets. This is known as trading at a premium. Conversely, when demand is low, the share price will fall below the valuation of the underlying assets. At this point the trust will be trading at a discount.
This structure differs to unit trusts and OEICs. These products are known as ‘open-ended’ because more ‘units’ of the fund can be created to meet investor demand.
What do trusts invest in?
They can invest in a wide variety of areas – depending on their aims – including shares (equities), property and other assets. However, they also have the ability to put their money into more difficult to access areas, such as private equity and infrastructure, as well as social and environmental impact investments. The investment calls will be made by a manager that’s been appointed to the hot seat by an independent board of directors that every trust has in place to monitor performance.
What unique qualities do they have?
There are a number of qualities and tools enjoyed by trusts that set them apart from other types of ‘pooled’ investments.
The first is the ability to smooth returns by holding back up to 15% of the dividend income generated during good years to pay out during leaner times. They can also borrow extra money and invest it in the hope of delivering enhanced returns to investors. However, this can mean even larger losses should the underlying investments fail.
As an aside, their closed ended structure also enables them to make long-term investment decisions as they don’t have to make buy/sell decisions based on money moving into and out of the fund.
Recent investment trusts trends
In 2023, purchases of investment trusts on adviser platforms actually fell 28% year-on-year to £948m from the previous year’s record high of £1.3 billion. The decline was attributed to the fact that the average discount reached its widest level since the global financial crisis more than 15 years ago.
The Technology & Technology Innovation sector was the best performer during the first half of 2024 with a return of 28%, according to data from the Association of Investment Companies (AIC). The Growth Capital sector came second with a 22% return, followed by Private Equity on 21%. The average trust, meanwhile, delivered 8% over the same period.
So far in 2024, there has been a whirlwind of corporate activity as investment trust boards continue to battle wide discounts. Richard Stone, Chief Executive of the AIC says: “The investment trust sector has always evolved through challenging markets, and this is one of those times where we are seeing that in action. While discounts remain wide, it’s encouraging to see that performance for the first half of the year has been strong – the most important measure of success for our sector.”
Three trusts to consider
Currently, there are around 400 investment trusts available in sectors as diverse as Asia ex-Japan, global, and UK smaller companies. Each trust will have its own stated objectives. As always, would-be investors need to research the market to ensure they understand exactly what a trust is trying to achieve and whether the manager has a strong track record.
Given the choice of trusts is so vast, here are three portfolios that we believe are worth considering:
TR Property
This fund’s experienced manager, Marcus Phayre-Mudge, invests in the shares of property companies of all sizes – and particularly those based in Europe and the UK. Well-run businesses in sectors such as retail, office, residential and industrial property are likely to be among its favoured names. The fund’s investment objective is to maximise shareholders’ total returns and it has a very diversified sector allocation that includes German residential sites and European shopping centres. Vonovia, which is a European multinational real estate business based in Germany, currently boasts the largest individual holding of 7.6%.
Ashoka India Equity Investment Trust
This trust, which aims to achieve long-term capital growth by investing in Indian companies of all sizes, adopts a bottom-up, stock picking approach. We like the trust’s unique approach to stock selection and their ability to go deeper into both the mid and small-cap markets. Its approach to ESG (environmental, social and governance) factors is also a bonus, particularly in regard to governance, which can be a critical issue in India. The largest individual holdings include ICICI Bank, the State Bank of India, and Tata Consultancy Services, which is an IT business.
Martin Currie Global Portfolio Trust
This is a high conviction, unconstrained portfolio of 25-40 global companies that aims to deliver long-term returns in excess of the MSCI All Country World Index. Its largest holdings include household names such as tech giants Nvidia and Microsoft, supercar manufacturer Ferrari, and Mastercard, the payment card provider. The trust has also successfully tapped into long-term themes, such as the rise of electric vehicles and the growing importance of artificial intelligence. Zehrid Osmani, the trust’s lead manager, has a proven track record at the helm of high conviction strategies and focuses on quality growth businesses.
