Investment Trusts  

How to spot a good investment trust

This article is part of
Guide to using investment trusts in client portfolios

How to spot a good investment trust

There exist several different types of investment vehicles through which clients can invest, such as open-ended funds, exchange-traded funds, passive funds and investment trusts.

While thousands of these types of funds are available to investors, there are only about 400 investment trusts, says Melissa Gallagher, co-head of investment trusts at BlackRock.

This means investment trusts need to stand out to get noticed, she reasons.

And while all investment trusts offer a number of special features that other types of funds cannot, a good investment trust utilises its natural advantages with a clear investment objective and strategy, consistently delivering – or over-delivering – on its promises, suggests Mike Wilson, head of sales at Janus Henderson Investors.

Costs are, of course, an important and obvious consideration for any investor, but it is also important advisers look for a trust with a differentiated strategy from its peers, suggests Harry Stein, sales and marketing manager at Mobius Capital Partners.

Mr Stein explains: “When we launched the Mobius Investment Trust last year, our goal was to create a vehicle that took a truly innovative approach to emerging markets.

“This strategy allows us to not only leverage our decades of expertise, but also offer the market something that is unique, and the closed-ended nature of an investment trust is perfectly suited to this form of engagement.”

So what are some of the other unique features that set good trusts apart from their peers?

According to Mr Wilson, the ‘special features’ of an investment trust include an independent board of directors, keen charges, appropriate use of gearing, a long-term approach to investing, open access to the fund manager, and tactical use of revenue reserves to support dividend payments.

Dividend record

Indeed, when choosing an investment trust, Claire Dwyer, associate director for investment trusts at Fidelity International, suggests one important question to ask is: “What is its history of paying dividends and has the level been sustained?”

She says this is important because “when things are good, investors get used to steady income streams from companies, but in more challenging times it will be the better-positioned trusts that prove their worth”.

Similarly, Annabel Brodie-Smith, communications director at the Association of Investment Companies, says investment companies have strong, long-term performance and income advantages, which mean many usually have impressive track records of dividend increases.

She explains: “There are 20 investment companies which have increased their dividends for 20 years or longer, with four companies having increased dividends for over 50 years.”

In its recent list of ‘Dividend Heroes’, published by the AIC on March 12, the City of London, Bankers, Alliance, and Caledonia trusts were all shown to have increased their dividends every year for more than 50 years.

She continues: “If their client is looking for income, they might also look at the investment company’s revenue reserves and dividend cover.