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.

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.

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.

The Global Smaller Companies Trust

This trust, which is managed by Peter Ewins, aims to secure a high total return by investing in smaller companies across the world. It benefits from a strong, dedicated small company team, while the dividend has risen in each of the last 52 years. The portfolio usually has around 185 holdings. This often includes fund positions that target markets where the team does not have dedicated in-house smaller company expertise, such as Japan.

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 62% of assets under management, include many household name companies. Overall, the portfolio has 55 holdings. AstraZeneca is the biggest at 5.6%*. It’s followed by 4.9% in RELX and 4.8% in Unilever*.

*Source: fund factsheet, 31 January 2023

This article was updated on 27 March 2023