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What is an investment trust?
An investment trust works in much the same way as a fund. It's a way to invest in a range of companies without picking individual shares.
Like funds, trusts invest in a 'basket' of underlying assets such as shares, bonds or property. But unlike funds, they are structured as companies listed on the London Stock Exchange. Investors in a trust share in the capital gains (or losses) and in any income payments made. As a result, trusts have two values: the value of the investments held in the trust and its share price.
Why do people invest in trusts?
Investment trusts have various bells and whistles that investors can use to their advantage. These include ‘rainy day’ reserves, which have enabled the vast majority of trusts to weather the Covid-19 dividend drought. by either maintaining or increasing dividend payments to shareholders.
Investors can also pick up a potential bargain when a trust is trading on a discount. Performance can be supercharged in rising markets by 'gearing'.
Investment trust performance can involve rather more ups and downs than funds, because of gearing and the effect of movements in the discount. But if you're invested for the long term, it is not worth worrying too much about short-term swings.
Most popular investment trusts
Below is a preview of the most purchased investment trusts by ii customers over recent months. For more detailed insights and performance data, visit our top investment trusts page.
Most purchased investment trusts in Q1 2021
|3||Fidelity China Special Situations|
|4||JP Morgan China|
|5||Baillie Gifford US Growth|
|8||Monks Investment Trust|
|9||BlackRock World Mining|
|10||City of London|
Source: interactive investor. Note: the top 10 is based on the number of “buys” between 1 January and 31 March 2021.
Why choose interactive investor to buy investment trusts?
✔ We offer the widest choice – more than 40,000 UK & global investment options, including over 600 investment trusts.
✔ We charge a low, flat fee of £9.99 per month. Most other investment platforms charge a percentage fee that grows with your investments.
✔ We give you a free trade every month. There are also no trading fees with our regular investing service.
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Best investment trusts for income
Investors looking for an investment trust that generates income should firstly consider UK equity income and global equity income trusts. These both invest in dividend paying companies, to produce an income for shareholders.
Other income options for investors to consider include commercial property and infrastructure.
One of the main advantages of an investment trust compared with funds is its ability to hold dividend reserves. We explain this in more detail below in the investment trust FAQs.
As a result, many investment trusts have impressive track records in growing their dividends year in, year out.
Trusts with increasing dividends
The most recent list of investment trust “Dividend Heroes” published annually (15 March 2021) by the Association of Investment Companies (AIC) shows that six trusts have now achieved increasing dividends for 50 years or more:
- City of London Investment Trust (one of our Super 60 funds)
- Bankers Investment Trust
- Alliance Trust
- Caledonia Investments
- BMO Global Smaller Companies
- F&C Investment Trust (one of our Super 60 funds)
There are 19 investment trusts that have raised dividends for more than 20 years in a row. This is slightly down on last year when 21 trusts were 'dividend heroes'.
The table below shows the 11 investment trusts that have increased dividends for 40 years or more. Most invest in global businesses that pay dividends. The remaining three investment trusts invest in dividend-paying shares listed on the UK market. Please note: figures correct as at 15 March 2021.
|Company||Sector||Number of consecutive
years dividend increased
|City of London||UK equity income||54|
|BMO Global Smaller Companies||Global||50|
|JPMorgan Claverhouse||UK equity income||48|
|Murray Income||UK equity income||47|
|Scottish American||Global equity income||47|
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Learn more about investment trusts
How do investment trusts work?
A fixed number of shares is issued. This raises a fixed amount of money for the manager to invest in a portfolio of assets. The shares are then traded on the stock market.
The share price goes up and down according to investor demand and supply. But (unlike open-ended funds) the trust manager's investment plans are not affected by these fluctuations.
Trusts have two values:
- The amount the investments themselves are worth in total (the net asset value or NAV)
- The trust’s share price on the stock market.
When the share price is lower than the NAV per share, this is known as a 'discount' to NAV. When the share price rises above NAV, the trust is trading at a 'premium', meaning investors who buy are paying more than the assets are worth.
If you buy at a discount which reduces or narrows (e.g. due to increased shareholder demand), your holding could gain in value, even if there's no movement in the underlying NAV.
Conversely, the discount could widen if shareholders started selling in numbers. So your holding could lose more value than the underlying assets.
What types of investment trusts are there?
There are various types, but the majority invest in equities. The main regions being UK, US, Europe, Asia Pacific and emerging markets.
A number of trusts simply adopt a global approach, in which the fund manager invests wherever he or she sees fit. Some investment trusts invest for growth, others focus on income, while some mix and match between the two. Others invest in a certain sector, such as biotech.
Another type, which has been gaining in prominence, is investment trusts that focus on alternative assets. In 2019 sectors that proved popular included renewable energy, infrastructure, commercial property and private equity.
There are other investment trusts available, such as:
- Venture capital trusts (VCTs) that invest in small unlisted companies. These come with certain extra tax breaks.
- Split capital trusts that issue a number of different types of share.
Can investment trusts’ ability to ‘gear’ improve performance?
Investment trusts are allowed to gear, or borrow to invest. This can improve their performance, but it means they tend to be more volatile than their open-ended peers.
Gearing in a rising market magnifies gains for each shareholder. But if the market falls, investors in a geared trust will suffer greater losses per share.
Simply put, if the manager borrows X to invest and the trust grows, the manager has to repay X plus interest but retains the investment growth as part of the trust's NAV. So if you have £1,000 invested (let's assume a constant share price for now) and the manager gears by 10%, then there is effectively £1,100 working for you.
Now, if that doubles in value to £2,200, the manager pays back the £100 plus, let's say, 1% interest. That leaves you - the investor - with £2,099. If the manager had not geared, you'd only have £2,000.
Conversely, if the same investment halves in value to £550, the manager still has to pay back £101. This magnifies the losses, leaving you with only £449 instead of the £500 you'd have without gearing.
Main advantages and disadvantages when investing in investment trusts
- Over the long term, investment trusts tend to outperform funds due to their various structural advantages.
- Much more consistent at raising or maintaining dividend payments compared to funds. This is due to their ability to hold back up to 15% of income generated every year.
- Fixed pool of assets – means fund manager is not distracted by investor money flowing in or out in the short term
- Opportunity to buy a bargain when a trust trades on a wider than usual discount.
- Investment trusts are allowed to gear, or borrow to invest. In a rising market, gearing magnifies gains.
- Overseen by an independent board of directors, who ensure the investment trust is being managed in line with shareholders’ interests.
- Generally, more volatile than open-ended funds due to the ability to gear and the potential for discounts to widen beyond NAV movements, so expect a bumpier ride.
- In a falling market gearing works in reverse - investors in a geared trust will suffer greater losses per share.
- Investment trusts can trade on a premium – so investors who buy end up paying more than the underlying assets are worth.
- Two layers often considered to make them more complex to understand
- Can be difficult to get information about less commercially focused trusts
Are investment trusts good for beginners?
Internationally diversified global investment trusts with a broad range of underlying investments can form an ideal portfolio core and are perfect for regular monthly investments. Many global and UK trusts are also ideal for income-seekers, because of their ability to smooth dividend payouts over the years.
Also consider investment trusts that adopt a ‘multi-manager’ approach. This means the portfolio is parcelled up, with different segments of the portfolio outsourced to carefully selected external fund managers. One respected trust that invest in this way is F&C Investment Trust, which is one of our Super 60 fund choices.
Do investment trusts pay dividends?
Income-paying investment trusts have a particular attraction for investors because investment trusts don't have to distribute all the income generated every year. Up to 15% can be held back each year, which means they can build up a ‘rainy day’ fund to bolster dividend payouts in leaner years. During the financial crisis, the majority of UK equity income investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves.
Some income-paying investment trusts are labelled ‘enhanced income’ and generally offer higher dividend yields than other income trusts. To achieve a higher dividend yield, enhanced income trusts finance their dividends from capital as well as income.