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Investment Trusts - June 2015

    CPD
    60min

    Introduction

    The implementation of the RDR in 2013 meant advisers had to consider investment trusts as part of their investment approach if they wished to remain independent. Furthermore, changes to charging structures by advisers and platforms mean investment trusts are no longer sidelined in favour of open-ended vehicles.

    For example, research from the Association of Investment Companies (AIC) in March showed that investment company total purchases on platforms by advisers and wealth managers was £452.7m in 2014, 19 per cent higher than the £379.1m recorded in 2013 and 106 per cent higher than the £219.3m in pre-RDR 2012.

    The pension reforms announced in the 2014 Budget has also seen more investors turn to the previously overlooked vehicles.

    Melissa Gallagher, head of investment trusts at Allianz Global Investors, explains: “Discounts across the sector hit all-time lows in 2014 and although there has been some widening in 2015, they remain narrow by historic standards.

    “Equally, changes in the regulatory environment continue to provide a tailwind for investment trusts. [They] have found a new relevance in the wake of the government’s pension changes: as investors hunt for alternatives to annuities, investment trusts’ lengthy track record of paying dividends, and also of growing those dividends over time, has proved a real advantage. Those trusts paying an income have seen an unprecedented surge in popularity.”

    One of the benefits of investment trusts in the income stakes is the ability to smooth returns as these vehicles can retain up to 15 per cent of their annual earnings.

    Simon White, head of investment trusts at BlackRock, notes this aspect, combined with the ability to distribute their reserves, makes trusts particularly attractive.

    “That can create smooth income streams, which is obviously very helpful if you’re looking to build up a regular source of income prior to, and after, retirement,” he explains. “An increasing number of funds are being set up to provide diversified multi-asset investment and [investment trusts] are seen as helpful building blocks, as people look to have a spread of assets to provide diversification of income streams.”

    Meanwhile, the dividend track record of investment trusts is something highlighted regularly, with the AIC revealing earlier this year that a fifth of AIC members in existence for more than a decade have raised their dividends for at least 10 consecutive years.

    Although these long-term dividend payers are dominated by global and UK equity income strategies, they also include trusts from the UK smaller companies, Asia Pacific and European sectors.

    So while equity income investment trusts may have delivered both dividends and performance, one of the advantages of the closed-ended structure is its ability to invest in more niche and illiquid areas, such as infrastructure and energy.

    Research from QuotedData shows that in the first quarter of 2015 investment trust areas that performed well included biotech and healthcare.

    Mr White notes: “There is a huge range of different income opportunities. As well as delivering attractive yields in traditional areas, there are an increasing number of new trusts in areas that are offering attractive alternatives to the traditional UK equity income option.”

    Nyree Stewart is features editor at Investment Adviser

    In this special report

    CPD
    60min
    1. Venture capital trust (VCT) issues in the tax year 2014/15 raised approximately how much?

    2. The SV Life Sciences’ International Biotechnology Trust was the best performer in the AIC Sector Specialist: Biotechnology and Healthcare sector for the 12 months to May 20, with what level of return?

    3. Investment company total purchases on platforms by advisers and wealth managers was what in 2014?

    4. How much tax relief could investors receive on a VCT if they hold it for a minimum of five years?

    5. The upper fundraising limit for Neil Woodford’s recently launched Patient Capital trust was increased to what level following a surge of interest?

    6. According to research by the AIC, what fraction of AIC members in existence for more than a decade have raised their dividends for at least 10 consecutive years?

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