It is easy to understand why many investors would prefer to invest using a fund than by picking individual stocks, shares or other assets.
Funds allow you to diversify your portfolio easily, as well as giving you the chance to benefit from the expertise of fund managers.
And in recent years a particular type of fund, the investment trust, has been becoming steadily more popular. According to the most recent figures from the Association of Investment Companies (AIC), investments into these funds reached record levels in 2017. But why?
These trusts are listed on the stock exchange, and are also known as close-ended funds. This year is the 150th anniversary of the oldest of these funds, the F&C Investment Trust.
Founded with the aim of “bringing stock market investing to those of moderate means”, the fund has continued with this goal ever since.
“The founders were determined to build in prudence, diligence and diversification from the start – in short, to give what was then a troubled and risky financial sector a good name,” says John Newlands, expert on investment companies and their histories. “Those founding principles have been maintained ever since.
A different structure
Most funds in the market are open-ended funds, and they work by splitting the assets the company invest in into units. When more people want to buy then sell, more units are issued.
Investment trusts, on the other hand, only have a limited number of shares that can be bought on the stock market.
If you look at an investment trust you will find there are two valuations. One is the share price, which is the price you will pay to buy the investment or what you will receive if you sell it (disregarding spreads and trading costs).
The other is the Net Asset Value, which is the value of the underlying investments. If the trust is trading at higher than its NAV, it is said to be “trading at a premium”, and if lower it is “trading at a discount”.
Thanks to the expertise of their fund managers as well as their unique structure, investment trusts have generally performed well over many years. Investment companies have strong long-term performance.
This is partly because trusts are able to do something called gearing, borrowing additional money for investments, which helps them make potentially bigger gains over time. On the flip side, however, if the market falls gearing will result in losses being greater.
No exit penalties
Open-ended funds are popular, but in the midst of the financial crisis, when many people wanted to sell, they encountered a problem. With an open-ended fund you have to sell units back to a fund manager, and they can refuse or impose exit penalties.
With an investment trust, you simply buy or sell the product on the stock exchange, so no penalties are imposed, although the price will move up and down with stock market sentiment.
Constant and rising dividends
In the current low interest rate environment, funds that pay a regular income are very attractive. Unlike open-ended funds, investment trusts are allowed to keep back 15% of their profits for “smoothing” purposes. This means trusts can use the income they keep back to help them pay dividends in years that have been less fruitful. This is why four investment trusts have increased their dividends every year for more than 50 consecutive years.
Figures from the AIC show over half of trusts that pay a dividend now pay on a quarterly basis to meet customer demand for regular income. There are 21 “dividend hero” investment companies which have raised their dividends every year for 20 years or longer, including F&C Investment Trust.
In their 150-year history, investment trust have been at the forefront of technology. The first trusts invested in railroads, natural resources and bonds. They have continued to invest n ground-breaking opportunities including technology, biotechnology and healthcare, emerging and frontier markets, private equity and venture capital. F&C Investment Trust’s successful investments have included Royal Dutch Shell, Apple and the Andrew Lloyd Webber musical Cats, illustrating its ability to move with the times.
Simon Fraser, chairman of the F&C Investment Trust, said: “The key to the trust’s success, having paid a dividend to shareholders in every year of its history and having increased dividends for 46 consecutive years, is that is has never stood still. It has continued to successfully evolve to ensure it remains relevant for the investors of today.”1
As always please remember that investments carry risk and you may not get back what you originally invested, Past performance should not be seen as an indication of future performance and there is no guarantee that dividends will increase or indeed continue to be paid.
‘This article written by Rosie Bigmore was first published on the Telegraph here.