Mr Budden says: “They are not a different asset class to Oeics but the closed ended structure can lend itself to investment in illiquid stocks as trusts don’t have to meeting redemptions in the same way as Oeics.”
Investment trusts could be suitable for a wide range of investors and there is a significant diversity in the types of investment strategy available.
Robin Stoakley, managing director for UK intermediary at Schroders, says an investor might use an investment trust for income.
If you are investing for income, Mr Stoakley says an investment trust may provide more stable income payments over time than an equivalent open-ended investment company (Oeic).
This is because investment trusts are permitted to retain up to 15 per cent of the income received during any financial year in a revenue reserve, whereas unit trusts and Oeics must distribute all of the income they receive.
Mr Stoakley says: “Holding some income in reserve helps to regularise dividend payments to investors through the ups and downs of the economic cycle – this is called dividend smoothing.”
A key consideration if investing in a trust for income will be how closely an investment trust fits with your overall income strategy and goals.
For example, with the potential to offer a regular, stable income, Mr Stoakley says investment trusts may be well suited to those looking for retirement income, or those requiring income to pay school fees, for example.
At a fund-specific level, Mr Stoakley says points to take into account include: the fund’s investment objectives, the country, region, sector(s ) and companies it invests in, the fund manager’s track record, the level of gearing, the fund’s dividend history and the frequency of pay outs, as well as the ongoing management charge and the price of the shares.
Mr Stoakley says: “Income investors should also check whether the growth of income the investment trust aims to deliver is above the rate of inflation, although there are no guarantees.”
For investors looking for income and growth, Mr Stoakley says one of the advantages of investment trusts is their ability to deliver both income and growth.
While some investment trusts aim to deliver immediate income, others aim to grow that income over time.
And some try to offer a mixture of both income and capital growth.
Mr Stoakley says it is worth noting that even an investment trust which concentrates on delivering income has the potential to provide capital growth as a consequence of the rising income it produces.
He says: “As with any investment, your capital is at risk when you invest in an investment trust. Past performance is not a guide to future performance and may not be repeated.
“Furthermore, as investment trusts have the ability to pay income from distributable capital reserves to smooth payments to investors, it is important to note that this can reduce the capital value of the investments in the fund.”
For those wanting access to illiquid asset class and alternative assets, Mr Stoakley says one benefit of investment trusts compared to open ended vehicle is that beyond income, growth and traditional categories, they offer access to investments in illiquid assets such as real estate or infrastructure.
For investors who need to mitigate overall portfolio risk, Mr Stoakley says an investment trust provides access to a professionally managed portfolio of investments.
He says this has the potential to give you a broad spread of investment opportunities, including access to different geographical regions and asset classes, and by diversifying your investment, can help to control the risk you are exposed to.
Investment trusts can also help investors to diversify the asset mix within their portfolio, thereby reducing overall portfolio risk, Mr Stoakley adds.
Whether you are saving for retirement or looking for a way to supplement your income, Tim Mitchell, head of investment trust sales at JP Morgan Asset Management, agrees that investment trusts can help.
They can be used as a complement to existing savings and investments, or several investment trusts can be combined to build the right investment portfolio to suit one’s individual investment needs, he points out.
Mr Mitchell says: “Investment trusts have a lot to offer in the pension marketplace.
“As more pensioners look to their investment portfolios to provide income throughout their retirement, trusts have the ability to build dividend reserves and pay out both income and capital, so can play a crucial role.”
