Investment trusts: Hearts and minds

Jeff Prestridge

Jeff Prestridge

I have always had a soft spot for investment trusts, ever since I jumped feet first into personal finance journalism in the mid-1980s.

Of course, the industry has not been without its mega controversies – most notably the awful and shameful split-capital investment trust debacle of the early 2000s.

And it has not been without its embarrassing moments as exemplified by the vast amount of money the Association of Investment Trust Companies poured down an open drain in promoting trusts in the run up to – and beyond - the bursting of the tech bubble in March 2000 with the ‘Its campaign’.

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Yet the investment trust industry has managed to survive and thrive. For better or worse, the AITC has transmogrified into the Association of Investment Companies. And with the advent of the retail distribution review, investment trusts can now compete on equal terms with other collective investments (open-ended investment companies and unit trusts) for the hearts and minds of both investors and financial planners.

You can even now buy them – the most popular trusts at least – on a majority of fund platforms without losing a proverbial arm and a leg in charges – something you were not able to do pre-retail distribution review. Purchases through platforms are up 19 per cent on 2013 as a result.

There are a number of reasons why I think investment trusts remain the investor’s – and adviser’s friend.

For a start, they have been around a long time, far longer than unit trusts.

Of course, just because something has been in existence for more than 100 years – 147 years in the case of Foreign & Colonial Investment Trust – does not necessarily make it fit for purpose in year 2015.

But it is comforting to know that some investment trusts have quietly been making money – and generating income – for shareholders since time immemorial. Graceful, under the radar, capitalism at work.

They are not sexy, they are not faddish, often possess ridiculous names (the likes of Merchants, Monks, Scottish Mortgage and Witan) but they deliver. And is not that what you want from an investment as a financial planner advising clients on long-term wealth creation?

Income sustainability is a big stand out feature. The ability of many income-oriented trusts to deliver a rising stream of dividend income – through stock market thick and thin - is comforting for many investors.

Trusts are able to do this by building up income reserves in the good corporate dividend years to help support payments to shareholders in the leaner years when dividends across the market are under pressure.

This use of reserves, unavailable to Oeics and unit trusts, makes many income investment trusts perfect for the new pensions world where an increasing number of people will keep their pension funds invested for longer while drawing down income. The reliability of income that equity income oriented trusts provide makes them perfect for the new pensions landscape.