Leveraging the benefits of investment trusts | Edinburgh Investment Trust
Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
The City of London is world-renowned for its innovations. One of the earliest that still flourishes today is the investment trust, which offers particular advantages to more sophisticated investors.
Sometimes referred to as the City’s best-kept secret, the advantages that investment trusts offer help explain why they have been around for over 150 years. Today there are more than 400 investment trusts, covering a wide range of asset classes.
They have immense potential to add value to investors’ portfolios if one avoids the more fashionable areas where new issuance tends to congregate.
A ‘closed-ended’ vehicle
An investment trust is a company listed on the stock exchange that invests in financial assets on behalf of its shareholders. It is called a ‘closed-ended’ fund because, like other listed companies, the number of shares is largely static (they can conduct share issues and buy-backs). This is unlike a unit trust, for example, in which units can be created and redeemed daily, according to investor demand.
Shares can be bought directly from an investment trust when it is launched, or when it seeks to raise more money through a fresh issue of shares. Once it has been launched, shares in an investment trust can be purchased in the ‘secondary’ market, i.e., from the stock exchange on which they are listed via a stockbroker or an online share platform. Like many markets, it tends to be in the second-hand arena that the best opportunities abound.
Appealing to the right investors
Investment trusts have several advantages that should appeal to the right investors. These include diversification and economies of scale – investors can benefit from a share in a trust that invests in a broad range of equities, bonds or real estate assets, something which would be prohibitively costly or even impossible as a single investor.
Professional fund managers allocate and monitor investments on behalf of investors and investment trusts typically have low total expense ratios thanks to scale economies and independent boards that oversee the cost effectiveness of the trust.
Good governance is also a feature of independent boards of directors, which have powers to replace fund managers if, for example, performance is unsatisfactory over a prolonged period or there is style drift.
In such volatile times, investment trusts can also offer relative stability. While investors may trade in or out of an investment trust, the underlying portfolio of assets can remain more stable. This allows a fund manager to invest for the long term without having to cater for potentially disruptive investors’ inflows and outflows, which open-ended funds must address.
By law, investment trusts must distribute 85% of their investment income as dividends, and many have excellent track records in maintaining and increasing dividends. This means investment trusts are also ideal income vehicles for those looking for this option.
The benefits of discounts
In addition to these advantages, two features of investment trusts make them appropriate vehicles for investors in the current environment.
First, many investment trusts can now be purchased at substantial discounts. Their prices can fluctuate just like other shares, rising when investors are confident in the strategy and falling when doubts prevail. The uncertainty that has been seen in financial markets in recent years has driven many investment trust prices significantly below the net asset values (NAVs) of the underlying portfolios. Again, this is a key difference from open-ended funds, which are priced at NAV. UK stocks have been particularly out of favour with international investors since Brexit, so investment trusts offer a ‘double discount’. When investor confidence recovers discounts should narrow, enhancing potential returns.
Second, because investment trust managers are allowed to borrow money (like any PLC, and again unlike open-ended funds) and invest the proceeds if they are optimistic about market conditions, this means they can buy more financial assets for every pound of shareholders’ funds. This will also magnify returns in rising markets (and will dilute them in falling markets).
As an example, in 2021 we refinanced the Edinburgh Investment Trust debt on a long-term basis at very low levels. Effectively this was gentle gearing at strategically and strikingly low rates.
There are thousands of investment vehicles to choose from, while financial markets themselves are becoming ever more complex and faster moving. But the advantages offered by investment trusts certainly mean they merit consideration for any portfolio, especially to invest in the market in which they are most at home – the UK.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The portfolio may invest in smaller companies. These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The Company borrows money to invest in the stock market within prescribed limits with the aim of enhancing returns. The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall. The Company may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of the company than if the underlying investment was held instead.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.