With the 2011 tax year nearing a close, many investors will be flocking to put their investments in order and searching for the most tax efficient package available to them.
In the past several years, there has been a steady growth in the popularity of investment trust savings schemes, stock and shares accounts equivalent to the traditional Isa.
The savings schemes give investors access to investment trust shares without the expense and trouble of going through a stockbroker. They are cheap and simple to use, their required minimum investments are low and they admit a flexible range of lump sums or regular savings plans. Since their launch in the 1980s, they have opened up investing in the stockmarket to a wider audience.
Sherry-Ann Sweeting, marketing manager at Scottish investment trust, says: “It’s very easy. It’s cost effective. You can invest a lump sum, or you can invest regularly. It enables you to have access to the performance of the tens or hundreds of companies that the investment trust that you’ve chosen invests in.”
Not only this, but an investment trust savings scheme gives inexperienced, time-starved investors access to a fund manager’s stockpicking expertise.
“Very often investors who use an online share dealing centre maybe play the market and have the time, energy and expertise to be picking stocks for themselves and managing their own portfolio on a regular basis,” Ms Sweeting explains.
“[However,] you still have this enormous range of stocks and it is therefore very difficult for the individual investor to access unless that is their hobby, [and] that’s all you do with your life. I would hazard that once you are over 100 [companies] you’re looking at an investment range where it would be very unusual for the individual to be able to manage. That is what you get through investing in an investment trust savings scheme.
“With an investment trust savings scheme you’re accessing the stockpicking expertise of the managers of the investment trust. For example, the shares that investment trusts invest in range from 50 or 60 [holdings] up to Foreign Colonial, which I think invests in up to 600 shares, so you’re accessing all those shares and the expertise of the fund managers picking those shares in a very cost effective way,” she adds.
As there is no maximum limit to the number of schemes an investor can hold, investing in such vehicles also allows an investor to diversify their portfolio.
Ms Sweeting says that global growth investment trusts can be the cornerstone of an investor’s portfolio, as they add breadth and spread the risk.
She says: “Investment trusts can be the centre and you can build out on that as you grow in expertise or as your risk/reward profile expands and you feel that you can look at something riskier, such as emerging markets or single sector investments. It depends what the portfolio is and what the requirements of the individual investor are.”
With cost at the forefront of every investor’s mind, and many fund management firms, such as Fidelity, Schroders, and Baillie Gifford, lowering their annual management charges (AMCs), investment trust savings schemes may also grow in popularity in coming years.
“Certainly if you’re looking at an equity portfolio and primarily at investment trusts, or collective vehicles to put in that portfolio, then it’s worth looking at investment trusts savings schemes, as they have lower charges than open ended funds,” argues Ms Sweeting.
Investment trust savings schemes are also extremely easy to access. An investor just needs to fill an application form, return it with cheque or direct debit details and send it to the scheme managers or administrator, who does the rest.
Investors then receive regular statements, usually twice a year, and notification on all purchases and sales, as well as an annual report and accounts and interim report and accounts of the investment trust they invest in through the scheme.
But, as with all equity investment, this is an option for the longer term. This is why investment trust savings schemes have proved particularly popular with parents saving for their children’s future.
Ms Sweeting explains: “If you’re saving for children, and you’re starting at the beginning, then you have 18, 21, or 25 years. History has shown that in the long term, equity investments outperform cash and other forms of investment. Time is something investors have got on their side, so it’s worth people who are investing for children considering collective investment schemes. A lot of them have ‘investing for children’ schemes, that allow you to set you to set up a separate trust or designated plan that is more tax efficient.
“There may be some investment or savings products on the market that say it is saving for children, but they have some hidden costs, something that you certainly don’t get with an investment trusts savings schemes, so investors need to be aware.”
Investment trust savings schemes have tax advantages too. Dividend income is paid net of lower-rate income tax, although higher-rate taxpayers may have to pay tax at a higher rate. Ms Sweeting recommends the latter opt for a standard Isa instead, which gives them a capital gains tax and income tax allowance. The Isa is regarded as a more tax efficient investment trust savings scheme for higher-rate tax payers, as those investing in a stock plan will not have any further tax liability.
However, Ms Sweeting argues that investors need to weigh up the pros and cons of each and see which one suits them best.
“Most basic investment trust schemes don’t levy an AMC, whereas with an Isa the majority levy some sort of AMC, so the investor would have to weigh up the tax benefit. If you don’t need your capital gain sheltered from tax, then it’s maybe better to go into an investment trust savings scheme,” says Ms Sweeting.
With the RDR coming in next year, Peter Walls, who manages the £5m Unicorn Mastertrust fund of investment trusts, says that more advisers will turn to investment trusts because of their “robust structure and low costs”.
“With the RDR coming up, multi-manager funds investing in investment trusts could be useful to IFAs who want exposure to the sector but do not have the expertise to do it themselves.
“Investment trusts have outperformed in most sectors in the long term against open-ended competitors, partly because they have lower charging structure and total expense ratios.
“They are also structurally robust. Many unit trusts and open-ended investment companies fail for years and people seem to be locked into them. That is not the case for investment trusts because they have boards of directors and shareholders who apply pressure to change things if things do not go well. They deserve to get a better audience among the IFA community,” he concludes.
Simona Stankovska is features writer at Investment Adviser
