Where I particularly feel that investment trusts can add value is in the income space.
The vast majority of my clients are in retirement and require income from their investment portfolios.
Some advisers still use what I consider to be the old-fashioned route of selling units regularly from all funds within a portfolio on the assumption that the price of the funds will increase while the number of units will fall.
This method has probably worked well since the financial crisis, but in a bear market it can have serious consequences for a client’s capital.
I believe that the most appropriate way to provide income is to invest into income-producing funds.
Providing this generates sufficient income, the clients’ units remain intact.
Most companies that use this method will only use a portfolio of income-producing unit trusts. The benefits are plenty: there is a good choice, you can choose income funds at a sector level (UK equity, global equity, etc) or put their faith in multi-asset income funds.
Typically this should be able to produce an income yield of between 3 per cent and 3.5 per cent a year after charges, which in the current low-interest market is a very attractive level of income and gives the clients the opportunity of benefiting from any potential upside of the investments.
But there is a problem with this approach. Although many funds’ objectives include growth in income, there can be no guarantee of this because unit trusts and Oeics must pay out all the income earned each year and hope that the following year, their investments will produce a bigger income.
The alternative is to take a risk and chase income, which could have a detrimental effect on capital if they make the wrong investment decisions.
With inflation rising, how can an adviser or self-invested client gain greater assurance of an increasing income? One option is to use investment trusts, which can reserve up to 15 per cent of their income to smooth dividends in future years.
At my wealth management company Milestone, we understand that investment trusts, as listed securities on the stock market, can and will fluctuate in price more than the underlying assets they own.
This is particularly the case when markets are stressed, and therefore investment trusts are considered riskier than a unit trust equivalent.
However, long-term investors should not be too concerned about this ‘noise’.
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To try and create a bit more certainty of at least a level and at best a rising income, we add to our portfolio of multi-asset unit trust funds a number of large, liquid investment trusts.
Our typical mix of 70 per cent multi-asset unit trusts, 25 per cent investment trusts and 5 per cent cash has served us well and has helped manage the downside risk.