A question of trust for income-focused investors

I have always had a soft spot for investment trusts. The love affair started back in the 1980s when the Guardian newspaper asked me to put together a special report on them and sent me packing up to Edinburgh to wander in ever-decreasing circles around Charlotte Square, home to many an investment trust.

I was hooked but not before being persuaded to sample every malt whisky known to man or beast and then left to stagger back to the Roxburghe Hotel in Charlotte Square where a single room suddenly took on double-room proportions.

Although the likes of Ivory & Sime and Edinburgh Fund Managers – Edinburgh-based investment trust stalwarts – have long since disappeared, the investment trust industry has plodded on, quietly delivering returns for shareholders.

Of course, the split capital investment trust scandal of the early 2000s nearly derailed everything but the industry recovered to fight another day, thanks to a conciliatory director general (Daniel Godfrey) at the helm of the sector’s trade body and a satisfactory compensation package thrashed out between those parties complicit in the mis-selling scandal.

Today, the investment trust industry is in good health despite a difficult economic and stock market backdrop. The Association of Investment Trust Companies has become the more concise Association of Investment Companies (Mr Godfrey, sadly, has long gone), a few trust boards have woken from their slumbers and sacked woefully performing investment managers, and trust charges remain a fraction of those levied by their more marketing-driven unit trust counterparts. If only more people (investors) knew about the virtues of these powerful investment instruments.

Maybe the onset of the retail distribution review (the dreaded RDR) and the ending of commission will pave the way for a renaissance of an industry that has often lived in the shadow of unit trusts.

Certainly, a few quality independent financial advisers (Saran Allott-Davey of Heron Asset Management in Newport, South Wales is among them) are beginning to pick up on investment trusts but I imagine it will be a while before investment trusts become the first collective fund choice of most financial advisers (if you have a view, feel free to drop me a friendly email at jeff.prestridge@mailonsunday.co.uk).

Although low charges and improving corporate governance are big investment trust pluses, I think one of the sector’s biggest selling points lies in the area of investment income. In particular, I am referring to the ability of income-oriented investment trusts to control dividend payments to the satisfaction of shareholders in search of a steadily rising income.