DYNAMIC AND FLEXIBLE – THE BENEFITS OF INVESTMENT TRUSTS
The structure of investment trusts makes them worth considering for investors who are seeking potential investment opportunities in the UK and further afield – with due consideration of risk.
One company – dozens of opportunities
Investment trusts are companies that invest in other companies’ shares. So, in effect, one investment trust provides instant exposure to a broad portfolio of investments – giving greater investment diversification than most private investors could achieve by investing in those companies directly.
And the choice of opportunities is wide. Aberdeen Standard’s investment trusts invest in markets from the UK to Asia. Many trusts focus on capital growth but some also aim to generate income.
Our range also includes some very specialist choices that involve higher levels of risk and are designed to exploit the potential from specific markets and industry sectors.
Market expertise hired independently
Managing a portfolio of investments takes skill, resources and a thorough knowledge of the markets in which you invest. With an investment trust, our investment knowledge and experience becomes yours.
Most importantly, the fund managers are appointed by the trust’s board and can be changed if the manager fails to perform. In other words, the fund managers constantly have to prove why they should be running the portfolio – a great incentive to keep delivering strong performance.
A structure for long-term vision
Investment trusts are often referred to as ‘closed-end’ funds because they have a fixed number of shares in issue which are bought and sold on the stock market. This structure allows the fund managers to take a long-term view of investments and invest in more specialist areas of the market, without the pressure to liquidate holdings if investors want their cash.
But please note that the share price of an investment trust is driven by market demand for the fixed number of shares in issue. This means the shares can trade at a price above (at a ‘premium’) or below (at a ‘discount’) the value of the trust’s underlying portfolio or ‘Net Asset Value’. At times there may be low demand for an investment trust’s shares which may affect their price.
Gearing – increasing reward potential
As public limited companies, investment trusts have more freedom than other types of investment fund. For example, they can borrow money – a practice known as gearing or leverage. Investing the borrowings can potentially increase returns for shareholders – and can allow the fund managers to increase exposure to investment opportunities as and when they arise.
However, gearing can also potentially magnify investment losses and therefore needs to be sensibly managed. All of our investment trusts make clear whether they use gearing and how much. Highly geared investment trusts involve greater risk than trusts that have lower or no gearing.
Balancing risk and reward
As pooled investments, investment trusts generally offer a more diversified exposure to equities than owning an individual share. However, unlike a bank account or building society savings account, your capital is at risk. This risk varies trust by trust, according to the particular investment policy and approach of each. It is generally recommended to hold investment trust shares for at least five years so that losses from any short-term volatility can be recovered (although this is never guaranteed).
Accountability – have your say
When you buy shares in an investment trust, you become a shareholder and that gives you particular entitlements – just like any shareholder of a public limited company. You can expect the board of the investment trust to work in your best interests. You are entitled to receive the investment trust’s annual report and accounts. You get full voting rights and can attend Annual General Meetings (AGMs).
The AGM is an opportunity for investors to hear the report from the Chairman and Board of Directors and vote on the resolutions presented for your trust and typically hear a presentation by the trust’s fund manager. Share Plan investors are sent details of the AGM automatically with the trust’s annual report. So you can have an active say in how your investment is managed.
Important features to remember
As we’ve explained, the company structure of an investment trust has lots of advantages but there are implications you need to be aware of:
The trust’s share price can fall as well as rise – just like any publicly traded share
Any income payments (‘dividends’) can vary and are not guaranteed.
The share price won’t necessarily reflect the underlying portfolio
Unlike funds such as OEICs and unit trusts, the trust’s shares may be worth more or less than the underlying portfolio, depending on market demand. This is because there is a fixed number of shares in issue.
Gearing can increase risk
Gearing provides a flexible way to increase potential returns. It also increases risk and trusts that use a lot of gearing can see significant swings in value. Be sure you are comfortable with the level of gearing in a trust before you invest.
Share price liquidity
At times there may be low demand for shares which may affect their price.
Important – Risk factors
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. Past performance is not a guide to future results. Investment may not be appropriate. Investment trusts are specialised investments and may not be appropriate for all investors. We recommend that you seek financial advice prior to making an investment decision.
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the UK. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1YG. Registered in Scotland No.108419. A member of the Aberdeen Asset Management group of companies. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.