Trusts or Funds – Exploring investment options

Keith Harrison

Private Client Adviser

Investment trusts and funds both enable investors to ‘pool’ their money together with other investors which helps to provide diversification and spread risk within a single investment. 

Investment trusts have a history going back over 150 years, long before the first unit trust appeared in 1931 or, later still, the birth of the open-ended investment company (OEIC). Total assets invested within the UK investment industry are around £9.1 trillion, with investments funds proving popular, but investment trusts account for only around £200 billion. Much of the reason for these investments lagging behind in popularity of the more recent unit trusts and OEICs, rests on the challenges with valuing them, the limitations placed upon them and that they don’t afford any investor protection.

However, in the last 10 years, investment trusts have seen a resurgence with total assets increasing by over £120 billion, more than doubling their overall value.

The major difference between investment trusts and unit trusts/Open-ended investment companies (OEICs) investment funds is the way in which they are structured: • An investment trust is a limited company with a fixed number of shares which investors can buy or sell on the stock exchange. That fixed number means that investment trusts are often referred to as closed-ended.
• A unit trust or OEIC operates as an open-ended fund. Their managers can create or liquidate units/shares depending upon investor demand. A successful unit trust or OEIC can grow rapidly in size, whereas an investment trust generally cannot.

The rise and fall of the price of investment funds will depend directly on the net asset value of the underlying assets within the fund.

For an investment trust, as it is closed ended and traded on the stockmarket, the price will also be affected by sentiment for the demand of the shares which may trade above (at a premium) or below (at a discount) to the net asset value of the underlying investments.

Investment trusts are also able to borrow, known as ‘gearing’, to take advantage of investment opportunities and act quickly, whereas investment funds are not allowed to borrow. This can enhance returns, however it also increases risk as it can also exacerbate losses. Some investment funds that are invested in illiquid assets, such as commercial property, have been forced to sell these assets to meet the demands of selling investors. For some unit trusts/OEICs this has resulted in temporary fund closures due to the time it can take to sell these illiquid assets. In an investment trust, supply and demand for the shares is reflected in the share price, without the need to sell assets. This means investment trusts can be an attractive vehicle for holding less liquid assets such as physical property or unlisted shares.

Investment funds, held in unit trusts and OEICs, have to distribute all the income from investments, after deducting charges, to their investors. In contrast, an investment trust can retain up to 15% of the income it receives. Over the years, investment trusts have used this distribution flexibility to create reserves to smooth the flow of dividends to their investors. As a result, some investment trusts can point to records of 40 or more consecutive years of rising dividend payments.

As many UK and overseas companies are stopping or reducing dividend payments in the wake of the Covid-19 pandemic, income distributions from many unit trusts and OEICs, particularly those that are income oriented, are set to fall. However, some investment trusts with cash reserves may choose to use this to maintain dividends for their investors.

Like many adviser firms, we do not currently include investment trusts in our advice considerations for the reasons explained here. However, we recognise that some of our clients may hold investment trusts within their portfolio outside of Origen. Our advisers can discuss your investment objectives and provide recommendations to suit your investment needs and build a portfolio to suit your needs, selecting from the options we believe are appropriate.     

The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

CA5548 Exp 08/2021

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