With the date for implementation of RDR rapidly approaching, advisers looking to remain independent must take a whole of market approach when considering investment options. Investment trusts potentially have an important role to play in this, as advisers consider how best to manage clients’ portfolios.
There are more than 400 investment trusts listed on the London Stock Exchange, but this is less than a quarter of the number of open ended investment companies (OEICs) available. That said, the investment trust sector is hugely diversified and covers all manner of things from property to below radar small caps.
What exactly are they?
Investment trusts are closed ended publicly listed companies. They have a fixed number of shares in issue, apart from instances of exceptional circumstances such as buybacks. Each share has a net asset value (NAV), based on the value of the underlying assets, but the share price can go up or down depending on investor demand.
Typically, investment trusts have boards that are independent from the investment manager to keep an eye on shareholders’ interests. The income from trusts can be distributed to shareholders as dividends and the individual shares can grow in value. Gearing of up to 10% of assets is permitted, allowing managers to borrow cash to fund conviction investment in key areas.
Investment trusts have traditionally been sold without commission, making it difficult for advisers on commission based remuneration models to incorporate them. The RDR is opening up investment choices with the removal of commission, creating a far more level playing field for all available investment vehicles.
Aside from the obligation to consider investment trusts as part of a whole of market approach, there are a number of reasons why they should be considered in their own right.
Management charges are low, usually far lower than achievable in OEICs. According to the AIC, almost a third of investment companies have total expense ratios (TERs) of below 1%, nearly two thirds below 1.5%.
Low management fees are more common in passive investments, but investment trusts provide active management at a low cost. This makes them an attractive option for those looking to keep down costs but do not wish to go down the passive management route. Low fees have contributed to many trusts’ long term performance.