Four reasons to hold trusts in your ISA (and four portfolios to consider)

Tony Yousefian 01/03/2018 in Strategy

Most people who invest in funds do so via an ‘OEIC’ – an open-ended investment company or a unit trust. But there is another vehicle that is very similar, called an investment trust.

We take a look at the four distinguishing attributes of investment trusts and suggest four for your consideration.

Why should I buy an investment trust?

1. Dividend smoothing

An investment trust can hold back up to 15% of its generated income for a rainy day – this is known as holding ‘revenue reserves’.The reason for doing this is known as ‘dividend smoothing’ or, in other words, being able to pay out a steady and rising level of income to investors, regardless of the investment backdrop.

2. Gearing

Another feature investment trusts have is the ability to gear, or borrow money to invest on behalf of shareholders. This can boost returns during rising markets or if the trust’s underlying portfolio does well. The greater the conviction a manager has in their holdings or the more confident they are on the backdrop, the more likely they are to use gearing. However, investors should be aware that gearing can also leave the investment trusts susceptible to greater losses during falling markets or periods of difficulty.

3. Discounts and premiums

Trusts can trade on either discounts or premiums to their net asset value. Essentially, this means they can be either cheaper or more expensive than the face value of their portfolio of investments.
Discounts can be attractive buying opportunities for investors because, when the discount narrows or even becomes a premium, the investor will get an even better return than the performance of the trust’s underlying portfolio. However, investors should note that premiums can also become discounts and discounts can widen further, which will have the opposite effect on the value of the investment trust.

4. Independent boards

Another defining feature of investment trusts is that they have independent boards, which act on behalf of shareholders in order to protect their best interests. This should provide investors with an extra layer of protection; it is a board’s responsibility to ask a trust’s management team difficult questions if the vehicle isn’t behaving as it is supposed to, for instance.


Which trusts should I consider?

1. Baillie Gifford Japan Trust

First up is the Elite Rated Baillie Gifford Japan Trust, which is one of the oldest in the IT Japan sector and has a track record spanning more than 36 years.

Baillie Gifford Japan aims for three to five-year growth through a portfolio of small-to-medium sized companies. It will hold between 40 and 70 stocks at any one time; these are chosen for their innovative business models, their multiple sources of growth or because they are disrupting traditional Japanese practices.

2. Fidelity Special Values

Closer to home, Alex Wright’s Fidelity Special Values trust could also present itself as a good option for investors. Alex aims for long-term growth through a portfolio of predominantly smaller companies which, despite having undergone a rough patch, he believes have the capability to turn their performance around for the better. While the trust doesn’t have an income mandate, Alex has managed to increase its dividends every year since taking to its helm in 2012.

3. Jupiter European Opportunities

Headed up by Alexander Darwall, the Jupiter European Opportunities trust holds a highly concentrated portfolio of companies, with its top 10 holdings accounting for three-quarters of the overall portfolio. Alexander adopts a patient and value-aware approach to company selection which, over his 17-year track record, has proven to be successful and repeatable.

4. Schroder Oriental Income

Schroder Oriental Income, which has been managed by Matthew Dobbs since its launch in 2005, aims to provide both growth and income through holding Asia Pacific companies (excluding Japanese equities) which offer both attractive and growing dividend pay-outs. It currently has a diversified portfolio of 85 holdings which, combined with its income focus, gives the trust relative stability compared to many of its peers that invest in the same region.

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.