For more than 150 years, the UK investment trust industry has successfully navigated wars, depressions, pandemics and many other types of crises. Current market conditions provide their own unique set of challenges, but history suggests the industry can continue to thrive. Here, we take a look at some of the distinctive benefits of the investment trust structure for investors of all types.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Why use an investment trust?
In spite of difficult market conditions, investment trusts continued their popularity in 2023, with total assets rising modestly to £268bn. Indeed, investment trust industry assets under management have doubled since 2015,1 which suggests their enduring popularity in the face of volatile markets, is a reflection of the diverse role investment trusts can play for investors looking for income, growth or a balance of both.
In recent years, demand has been particularly strong for investment trusts serving alternative areas such as private equity, infrastructure and real estate1. This reflects their potential inflation-protecting qualities, stemming from the pricing power (the ability to pass on rising costs to customers) of underlying businesses and the presence of contractual agreements that explicitly link certain revenue streams to inflation. However, it also highlights an important advantage of investment trusts. They are 'closed-ended’ – in other words, they don’t have to sell assets when investors redeem. This means investment trusts provide permanent capital to the fund manager, allowing them to take a long-term view on the assets they hold.
This makes them an ideal vehicle to hold illiquid asset classes, but also other assets that are less easy to buy and sell, such as smaller companies, commodities and emerging market equities. These areas could all bring new sources of potential capital return and income to a portfolio.
BlackRock manages nine investment trusts focused on specific market niches, and, for more than 30 years, has been helping investors access their distinct advantages, some of which are described below.
Diversification
Diversification has become a more difficult challenge for investors to overcome, with correlations increasing between conventional equities and bonds. Investors have become accustomed to bond and equity prices moving broadly in the same direction, which has meant casting their net more widely to diversify portfolios. Investment trusts have helped them do this by providing access to assets that aren’t readily available through open-ended funds.
In 1999, more than 80% of investment trust industry assets were concentrated in opportunities in public equity markets. Today, that figure stands at less than 50%, because the investment trust industry has been helping investors overcome the diversification challenge by providing access to a range of opportunities where risks and returns are less correlated to traditional asset classes, including infrastructure, property and other specialist areas.2
Income opportunities
Investment trusts are also a useful source of flexible income. This is not only because they can include alternative, income generative assets not readily available to open-ended funds, but also because trusts can build income reserves. Not all income that is generated by an investment trust income portfolio needs to be paid out each year. This means they can smooth the flow of income to investors by building up a buffer of “reserved income” in the good times, with a view to paying it out in more difficult conditions, when many companies may be cutting their dividends. Some investment trusts have built reserves worth in excess of a whole year’s dividend to sustain their payouts to investors in tougher times.3 This ability is highly prized by income investors who prefer to see a more reliable flow of dividends regardless of the broader investment environment.
Indeed, many investment trusts have an explicit long-term commitment to dividend growth. The Association of Investment Companies (AIC), the industry body that represents the investment trust sector, publishes an annual list of its “dividend heroes”. These are the investment companies that have delivered dividend growth in 20 or more consecutive years. For example, earlier this year, the BlackRock Smaller Companies Investment Trust joined the list, having increased its payout to shareholders for the 20th consecutive year in 2023.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Growth potential
The allure of investment trusts goes well beyond just income investors, however. Many investors that are looking for higher growth or a balance of income and growth may be also attracted to the investment trust structure, because of its ability to cater for a range of investment objectives across a broad suite of asset classes.
Cost competitive
One of the key benefits of the investment trust structure is the presence of an independent board of directors. The board acts as a robust and effective governance and risk management system, overseeing the trust’s investment strategy and ensuring alignment with its stated objectives. In turn, this helps to promote transparency, accountability and underpins investor confidence.
This independence can come into its own in times of market turbulence. Boards can help to monitor the performance of the company they oversee and should represent their shareholders to ensure that their trust continues to be competitive. According to the AIC, in 2023, 26 investment companies “changed their fees during the year to benefit shareholders” in this way.4
Conclusion
Investment trusts could offer investors of all types some uniquely attractive benefits. They can help to improve a portfolio’s diversification by providing access to a broader range of investment opportunities. Meanwhile, they could also offer a source of stable income and significant growth potential.
Overall, there is a wealth of choice in the investment trust sector, which can help investors to build balanced portfolios that can fulfil a range of objectives over the long term, even in challenging market conditions.
For further information on BlackRock’s investment trusts, please visit:
www.blackrock.com/its
