Investment trusts have a long history, being considered closed-ended investment vehicles that hold a specific number of shares.
If you’re seeking a portfolio with the right mix of assets, investment trusts can provide you with that. Several investment trusts have proven their ability to drive dividend growth for five decades, while others have time and again fared better than some of the open-ended funds.
Investment Trusts Explained
Investment trusts or closed-end trusts are collective investments that pool investors’ money to hold a diversified portfolio. They are usually publicly traded companies that aim to turn a profit by buying other assets.
The number of securities in a portfolio can vary with an investment trust. Sometimes, the portfolio can have around 30 different assets, but it can also consist of hundreds in one or more industries.
The ability to make decisions related to the investments falls on the fund manager, who is also tasked with ensuring that the trust’s investment goal is met.
Diving Deeper into Investment Trusts
Investment trusts are also called closed-end trusts because they put money into a specific number of shares. They are quoted on the London Stock Exchange (LSE), allowing market players to buy/sell shares at real-time prices, just like shares in regular companies.
Fund managers have a specific amount of investment dollars but can also borrow to make another investment on top of the original one. Such a strategy is known as gearing, which increases fund managers’ potential returns as well as their potential losses.
Moreover, gearing is not widely used in investment funds. In fact, many types of investment funds are prohibited from using this method. One reason is that gearing would allow funds to generate extra cash from investors if they’re open-ended.
Pros and Cons of Investment Trusts
The pros of using investments trusts are as follows:
· Diversification
As mentioned above, investment trusts pool investors’ money so they can hold a diversified portfolio which is usually ready-made and handled by experts. That saves investors time and money that would have been otherwise spent on buying individual shares in different companies.
· More Investment Options
Investment trusts have access to a broader set of investments than funds since they can also invest in unlisted assets, which may help amplify returns.
· Real-Time Trading
Unlike funds that are forward priced, investment trusts allow Investors to buy/sell assets at live prices and set stop loss orders to minimize their potential losses if the price unexpectedly makes a sharp drop.
· Stable Income Source
Investment trusts are an excellent option for investors looking for a reliable and stable source of income. That’s because investment trusts can tap on reserves when the situation in the market seems bleak.
Any investment is not without risks. Here are the cons of using investment trusts:
· Gearing
Gearing is also a double-edged sword that makes investment trusts more volatile than other funds. This strategy can raise the returns but also increase the losses.
· Annual Management Fees
Investment trusts can charge an annual management fee of 2% or higher, compared to active funds’ 0.5% - 1% yearly fee. Such costs can be inconvenient as they can gradually reduce the portfolio’s value.
· Valuation
While investment trusts can access unlisted securities, the value of such assets may not be specific and may only be determined quarterly. Therefore, relying on the net asset value will not exactly help investors make a final decision.
