Private investors in the UK have a love affair with collective investments.
The concept of pooling money with other like-minded investors into tradable investment vehicles that provide access to a wide range of asset classes, sectors and countries has proved a very successful and cost-effective means of getting a foothold in the stockmarket for a relatively small outlay.
The advent of tax-efficient personal equity plans and individual savings accounts (Isas) allowed this love affair to blossom further in the last 25 years.
Investment trusts are the oldest form of collective investment available to investors and their origins date back to the 19th century when the Foreign and Colonial Government Trust was set up in 1868. According to the Association of Investment Companies (AIC) there were (as of December 2014) 391 trusts with a combined market capitalisation of £104bn.
Although very much a part of the UK investment industry’s fabric, during the past 30 years they have been somewhat overshadowed by the unit trust and open-ended investment company (Oeic) industry and, more recently, by the prolific growth of passive exchange traded funds (ETFs) during the last decade. Latest figures from the Investment Association show that there are £6trn of assets being managed by fund managers in the UK alone, while iShares (owned by BlackRock) boasts assets of $998bn (£665bn) spread across 720 ETFs.
Given the huge disparity in assets under management, some might conclude that investment trusts have become the ‘poor relation’ within the collectives industry, but in fact the investment trust sector is in rude health as evidenced by several new issues in recent years.
Mixed asset exposure
BlackRock and Terry Smith’s Fundsmith both launched new equity trusts (providing exposure to North America and emerging markets respectively), while Neil Woodford brought his Patient Capital investment trust to the market this year, with an £800m share issuance far exceeding the targeted £500m.
For private investors, the case for some exposure to investment trusts in any mixed asset portfolio remains strong. At a practical level, split capital investment trusts offer different share classes to cater for the specific needs of investors, be that income or longer term capital growth. Unlike unit trusts, investment trusts trade on the stock exchange like any other listed company and can be bought and sold throughout the day, rather than just once a day.
There is also the concept of discount to net asset value (NAV). The underlying asset pool is valued once a day, but the daily share price will fluctuate based on supply and demand, so at any point, the shares may trade at a premium or discount to NAV.
The attraction for investors is that if, for example, a share is priced at 100p at a discount of 10 per cent, investors are effectively paying 100p for an asset pool worth 110p per share.
In addition, the investment trust manager can look to boost returns by borrowing funds, effectively gearing up the portfolio. This can be a very useful tool in high-growth sectors such as healthcare and technology, or in more generalist trusts when markets are trending higher. The main caveat is that gearing works in reverse when markets decline.
Like their unit trust counterparts, a majority of investment trusts offer regular savings plans alongside lump-sum investments, typically allowing minimum investments of £50 per month.
Again, for investors wishing to gain exposure to markets with a view to building funds to cover future education fees for children, or planning for retirement alongside a normal pension plan.
Similar to unit trusts and Oeics (but unlike ETFs), investment trusts provide the investor with access to professional managers who can manage the underlying asset pool on an active basis.
Liquidity issues
While there are many trusts focused on the main UK equity markets, investors can also gain exposure to all of the other main geographical equity regions, pure global equity trusts and ones that specialise in individual sectors.
From a tax perspective, UK listed equity investment trusts that pay dividends are subject to the basic 10 per cent income tax credit, and gains realised on disposals will also fall into the annual capital gains tax allowance.
Investment trusts can be held within individual savings accounts, thus sheltering savers and investors from any potential capital gains tax on future gains.
In highlighting some of the attractions of investment trusts, investors should be aware that generally speaking, they fall down against unit trusts and ETFs on liquidity. The former are both open-ended vehicles and the manager can create units/shares where demand from new investors outweighs supply from selling investors.
Investment trusts are public limited companies with a finite number of shares in issue. On occasion, particularly in volatile markets, it can be difficult to sell large holdings without pushing the quoted bit price down, so potential investors should focus on the ‘market cap’ of each trust and if possible, look at the daily trading volumes in each to gain a feel for liquidity.
Looking ahead, the ability of the financial services sector to innovate and continually reinvent itself will no doubt lend support to the collective investment industry – perhaps more so with exchange-traded funds, which can benefit from both rising and falling markets, and in recent years have offered investors access to funds.
It is quite likely that the investment trust industry will continue to grow at a proportionately slower rate, while retaining its more traditional approach to investment.
That approach should chime with many investors, particularly those who prefer an uncomplicated approach to managing their investment affairs.
Peter Robertson is senior investment manager at Ramsey Crookall
