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 enduring benefits of the investment trust structure for investors aiming to achieve income, growth or a balance of both from their portfolio.
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.
Board independently represents shareholder interests
One of the key benefits of the investment trust structure is that an independent board of directors is appointed to look after shareholders’ collective interests. 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 independent oversight is designed to promote transparency, accountability and should underpin investor confidence in the individual investment trust and, indeed, in the industry as a whole.
Listed on the London Stock Exchange
Another key difference between an investment trust and an open-ended fund like a unit trust, is that investment trusts are listed vehicles. A stock market listing ensures a simple and liquid route for buying and selling investment trusts, especially via online trading platforms or through an independent financial adviser. A listing on an internationally recognised exchange such as the London Stock Exchange requires listing rules to be applied as set by the Financial Conduct Authority, thus access to an exchange can regulatory transparency, provide visibility and credibility, which all help to ensure the continued attractiveness and relevance of investment trusts to the modern investment audience.
Ability to smooth income
Rather than having to distribute all their earnings as dividends each year, investment trusts can retain up to 15% of earnings in reserve. Retained earnings can be particularly valuable for income investment trusts because they can release these reserves during more challenging economic periods, in order to smooth the flow of dividends to their shareholders over time.
Closed-ended structure
Investment trusts are closed-ended funds, which means there is a finite number of shares in issue. This is a key differentiator for investment trusts versus open-ended funds, where the number of shares changes on a regular (usually daily) basis to reflect the balance between supply and demand. For investment trusts, supply and demand is balanced by the market through movements in the share price. This can often move away from a trust’s net asset value (NAV for short, a transparent and tangible measure of the prevailing value of a trust’s assets), which means investors sometimes have the opportunity to buy an investment trust at a discount, when the share price is trading below NAV.
Key ability to use gearing
Investment trusts can borrow to increase the amount of assets that are available for investment. This effectively amplifies the return available to investors, increasing the level of exposure to markets in both directions. Investors tend to benefit from additional exposure to rising markets over the long term but may be hit harder if stock prices fall in the short term. The level of borrowing, or “gearing” as it is known, is set by the portfolio manager but overseen by the board, which ensures that the extent of leverage remains sensible in the context of an investment trust’s overall mandate and objective.
Relatively sophisticated
Investment trusts come in all shapes and sizes, but one of the benefits of the structure is that it can cater for more sophisticated investor needs. For example, the use of gearing explained above, may appeal to more adventurous investors, while the ability to retain earnings may appeal to those clients that are investing for income and growth. Meanwhile, other investment trusts may offer the ability to enhance returns through the use of derivatives or, as we explore below, invest in less liquid asset classes that offer premium returns.
Opportunity to invest in less liquid asset classes
The closed-ended, listed nature of investment trusts means that they are suitable for investors looking for exposure to less liquid asset classes such as private equity, real estate and commodities. These asset classes are not often readily available for direct investment, because of the large ticket size attached to individual assets and, for physical commodity assets, the problem of storage. Nevertheless, they may be attractive for the balance of income and growth opportunities that they provide, and investment trusts represent an attractive route to market for providers of these strategies.
Permanent Capital Structure
Meanwhile, long-term investors should be reassured by the permanent capital structure of investment trusts, particularly for less liquid asset classes. Open-ended funds have suffered liquidity issues in the past, especially in areas such as real estate and unlisted securities. This has made the appeal of investment trusts as an effective structure for less liquid opportunities even more apparent.
Kaleidoscope of choice
Finally, the range of options available to investment trust investors covers the full spectrum of opportunity. From generalist global exposure through to specialist investment trusts that cover specific niches of the market, the investment trust structure has proven enduringly relevant. Investment trusts for income, capital growth and a balance between the two are readily available, in an industry that effectively caters for all investor needs.
Enduring relevance
The investment trust industry offers something for everyone. Their permanent capital structure enables active managers to deliver capital growth and income across a diverse range of opportunities, regions and asset classes. Meanwhile, their stock market listing makes them easily accessible to all investors.
The industry is as relevant today as it was when the first investment trust was launched back in 1868. The world has changed profoundly during this time, and some of the opportunities captured by the available range of investment trusts, have helped to drive that change. Undoubtedly, the investment landscape will continue to evolve, with abundant long-term opportunities to be captured. Investment trusts remain a highly attractive structure, enabling effective access to these evolving opportunities for investors of all types.
For more information about Blackrock’s diverse range of investment trusts that invest, catering for income and growth investors, please visit our Income & Growth Hub.
