Five benefits of investment trusts

Investment trusts have been around for more than 150 years – and their unique qualities make them attractive to a variety of investors.

They are companies that are listed and traded on the London Stock Market in the same way as if you held shares in corporate giants such as Tesco.

Here we take a look at some of the main benefits provided by trusts –also known as investment companies – and highlight some that may be worth considering.

Five benefits of investment trusts

Investment trusts are very similar to ‘funds’, in that investors’ cash is pooled and can be put to work across a wide range of areas, including other companies and alternative asset classes. But they also have five extra characteristics. These are:

  1. Revenue reserves: investment companies can smooth the income they pay out by holding back up to 20% of the income generated in good years to pay out at a later date.
  2. Closed-ended: They are also known as ‘closed-ended’ because there will only ever be a set number of shares available to buy, irrespective of the demand. This structure is also useful in allowing trusts to access more specialist and illiquid areas of the market (areas that take longer to buy and sell).
  3. Premiums and discounts: while the net asset value (NAV) of a trust is based on the underlying holdings, the value of a trust can go up and down in the same way as other share prices. If a trust is popular it may trade at a premium to its NAV but if it is less popular it may trade at a discount.
  4. Gearing: a trust manager can borrow money in order to invest more at times when they are confident an asset will appreciate in value. This can enhance returns. But if the manager gets it wrong, it can also enhance losses.
  5. Independent board: trusts employ an independent board so that shareholders’ interests are represented. It meets several times a year and constantly monitors the trust’s performance.

Learn more about these characteristics in our short video series.

Five investment trusts to consider

Here we highlight five different trusts, each of which focuses on either a particular region, sector or size of company.

Baillie Gifford Japan Trust

This trust invests in medium to smaller sized Japanese companies that are believed to have above average growth prospects. Its manager, Matt Brett, invests in a spread of 40 to 70 companies whose growth opportunities may present themselves in a variety of ways. For instance, it may be due to innovative business models, the disruption of traditional Japanese practices, or broader market opportunities. Currently, its largest stock position is in SoftBank group*, the investment firm that specialises in companies involved in sectors such as technology. Other prominent names among its 10 largest holdings include Sony, the technology conglomerate, as well as Sysmex, the health care business*.

Polar Capital Global Healthcare Trust

Polar Capital Global Healthcare gives investors the opportunity to invest across what it sees as a diverse and rapidly advancing industry. The portfolio is diversified by factors such as geography, industry sub-sector and investment size. It is also split – for operational purposes – into growth and innovation portfolios. Innovation companies will be small/mid cap innovators that are driving disruptive change, giving rise not only to new drugs and surgical treatments, as well as changes to healthcare delivery. The trust’s holdings are split between biotechnology, healthcare distributors, equipment providers, facilities companies, technology firms, and pharmaceutical giants.

European Opportunities Trust

Formerly known as the Jupiter European Opportunities Trust, this trust offers investors access to a high conviction portfolio of European equities with a bias towards medium and larger companies. The manager has developed a consistent investment process that has a record of success in different economic environments. Firms benefiting from economic tailwinds and in strong positions within their industries are preferred and the manager particularly likes businesses with proprietary technology and companies that have a business plan that provides them with long-term sustainable growth.

BMO Global Smaller Companies

This trust, which is managed by Peter Ewins, aims to secure a high total return by investing in smaller companies across the world. As one of the largest specialist global smaller companies investment trusts, it benefits from a strong, dedicated small company team, while the dividend has risen in each of the last 51 years. The portfolio usually has around 185 holdings. This often includes 10 fund positions that target markets where BMO does not have dedicated in-house smaller company expertise, such as Japan. Holdings include Eastspring Investments Japan Smaller Companies, Pinebridge Asia ex-Japan Small Cap Equity, and the Scottish Oriental Smaller Companies Investment Trust*.

Murray Income Trust

Founded in 1923, this trust aims for a high and growing income with capital growth by investing in a portfolio of mainly UK equities. Its 20 largest holdings, which account for 53% of assets under management, include many household name companies. Overall, the portfolio has 61 holdings. Drinks giant Diageo, the owner of brands such as Smirnoff vodka and Captain Morgan rum, is the biggest at 5%*. It’s followed by 4.9% in AstraZeneca, the pharmaceutical company. Consumer goods company Unilever, Howden Joinery, power firm National Grid, banking group Standard Chartered, and mining giant BHP are also on the list*.

*Source: fund factsheet, 31 December 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.