Investment trusts: Hearts and minds

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’.

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.

They are not sexy, they are not faddish, often possess ridiculous names but they deliver

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.

I am always left somewhat astonished after receiving the latest information from the AIC’s press office on those trusts that have managed to keep growing their dividends. Some of them have more than 40 years of consecutive annual dividend increases behind them – the likes of City of London, Bankers (hardly an auspicious name for a shareholder-friendly trust) and the oldest trust of all, Foreign & Colonial.

Of course, nothing is forever but if I had an invested pension (Sipp) which I was drawing income from, investment trusts would form a key component of the underlying trust mix.

Low charges – in a world where charges are increasingly under the spotlight – are also commonplace across the trust world. For example, Scottish Mortgage, Baillie Gifford’s £3bn flagship fund, has ongoing charges of 0.5 per cent. I am sure even the Millers of the True & Fair Campaign must be impressed with such competitive running costs. If only such low charges were a feature among unit trusts of an equivalent size.

What I also like about investment trusts is the fact that, although many of them have been around the block and back, change is never far away. Increasingly, trust boards are scrutinising investment performance like never before and in some cases sacking the managers.

Investment trust boards are scrutinising investment performance like never before

We have just seen it at British Assets where managers Foreign & Colonial were dumped in favour of BlackRock. The trust, renamed BlackRock Income Strategies, now has a more diversified approach to income generation, and is being pitched as a perfect holding for a pension fund. Progressive change.

More investment trust boards should push through similar change.

This brings me nicely on to Alliance, a Dundee based investment trust with 48 years of annual dividend increases behind it and whose chief executive is Katherine Garrett-Cox (recently short-listed for the Veuve Clicquot businesswoman of the year award).

This £3.6bn trust is currently under attack from US hedge fund Elliott Advisors which wants to shake up the underperforming fund. First step in this process is to get three new non-executives appointed onto the trust’s board.

It is great stuff. Irrespective of whether Elliott is successful or not later this month – the matter will be decided at a shareholder vote on 29 April – the Alliance board knows that the trust’s disappointing investment performance must be addressed. Shareholders, small and large, should ultimately benefit.

It is a shame similar pressure cannot be applied to some of the sleeping fund giants that occupy the Oeic and unit trust universe.

Given a choice between a unit trust and investment trust, I would choose the latter every day. Would you?

Jeff Prestridge is personal finance editor of the Mail on Sunday