Although investment trusts are still a bit of a secret within the investment world, we think they are an excellent way to invest for the long term, and a great way for families to build up wealth. Investment trusts are listed on the London Stock Exchange and as such can be bought or sold just like any other public listed company. Investment trusts provide investors with the opportunity to invest their money into a diverse range of companies or types of assets, and the trust itself is managed by a dedicated investment manager.

Like other types of funds, investment trusts are grouped into different sectors depending on the types of assets and the geographical regions in which they invest. The Association of Investment Companies (AIC), the trade body which represents investment trusts, maintains over 30 different sectors, including UK Equity Income, Global Smaller Companies, Real Estate, Technology & Media, and Private Equity, to name just a handful. So, whatever your attitude to risk, regional or sectorial focus, you’ll find an investment trust that suits you.

How investment trusts compare with other funds

Most of the types of funds available for UK investors are ‘open-ended’, meaning their size depends on inflows and outflows of investor money. If more investors want to invest in an open-ended fund, the fund can simply create more units for investors to own. However, when investors want to get their money back, they must sell those units back to the fund directly. This means that when lots of people decide to sell at the same time – during periods of high volatility for example – the fund shrinks in size and the assets held by the fund must be sold, potentially at a loss.

However, investment trusts are structured differently. They are closed-ended, meaning there are only a fixed number of shares ever in circulation. This makes them easier to manage, as investors can buy the shares on the stock market rather than buying them from the fund (as is the case for open-ended funds). And when investors choose to sell their investment, the investment trust itself is not forced to sell its assets. This helps preserve the capital value of the investment trust. And because of this, managers of the trust can invest with a longer-term horizon in mind, thereby reducing portfolio turnover and bringing down trading costs.

Income consistency

One of the main reasons investors are drawn to investment trusts is because of their historical record of paying consistent dividends. Investment trusts don’t have to pay out all the income they receive from their portfolios each year. This means they can keep back in reserve some of the income they generate during profitable years (usually 15% of their net income each year) and use it to boost dividends during leaner times. This structural benefit has enabled investment trusts to pay consistently rising dividends through both good and bad years, something that open-ended funds are simply unable to achieve.

In volatile market conditions, when the performance of the underlying investments is harder to come by, those dividends can make a huge difference to the value of your investment. The Association of Investment Companies (AIC) publishes an annual list of ‘Dividend Heroes’ and ‘Next Generation Dividend Heroes’ – investment trusts that have increased their dividend pay-outs for more than 20 years and 10 years in a row. Several Janus Henderson investment trusts hold a place in both categories – reflecting the quality and consistency of its investment trust range.

How gearing can create investment opportunities

Because an investment trust is a company, it is able to borrow money to buy assets and make investments, which is known as ‘gearing’. Gearing can help the managers of the investment trust to gain additional exposure to those areas of the markets where they expect the rewards are worth the risks. Gearing can potentially enhance returns, resulting in a better investment return compared to other vehicles. However, gearing has the potential to mean larger losses if the value of the assets falls, so it’s an investment strategy that is used only sparingly, and only when necessary.

Ways to invest

Investment trusts can be held within ISAs, Junior ISAs, and junior pensions, and you can invest in Janus Henderson investment trusts via several different fund and share dealing platforms including Hargreaves Lansdown, Charles Stanley, AJ Bell, and Interactive Investor. You can choose to increase or decrease or start and stop your investment contributions at any time. However, investing even small amounts on a regular basis can help to iron out some of the short-term volatility that stock market investments routinely have to cope with. But volatility isn’t necessarily a bad thing, especially if it means the investment manager can buy up different assets when they are more cheaply valued. This is where holding investments that are actively managed can reap the rewards.

Actively managed

Active fund management is when the fund manager, or fund management team, is fully responsible and accountable for the performance of the portfolio they oversee. Active funds will aim to outperform a specific benchmark or index, (the FTSA All Share Index, for example) and the fund managers will carefully select the investments they want to buy or sell to achieve their target returns.

Active management is important, and particularly useful, during periods of volatility, as the investment manager can choose to take more defensive or aggressive positions depending on their view of the direction of the market, hopefully picking up bargains along the way. Of course, even though active management can help fund managers to outperform, there’s no guarantee that the fund they manage will deliver a better return.

Investment trusts are a great long-term option

Opportunities for growth and income, as well as a combination of the two, makes investment trusts a useful investment vehicle to set aside money now that won’t be needed for a few years. As you are saving for your family’s future, this should give your investment a longer time horizon, meaning you can afford to take on higher risks and invest in a variety of different assets.

Additionally, over time, choosing to reinvest dividends – instead of taking them as income – can have a significant impact on the value of your investment. When you reinvest, you are effectively using the dividend proceeds to buy more shares, growing the overall value of your investment, and increasing the number of shares you own. But it’s important to remember that all investments come with an element of risk, and that however long you choose to invest, there’s always a chance you might still get back less than you invested.

For many investors, the combination of greater flexibility and future growth potential gives investment trusts the edge over more conventional open-ended funds. And when your children eventually fly the nest, your investment trust can prove to be a valuable asset in helping you achieve a comfortable retirement.

 

Find out more

For more information on investment options and the steps you can take to secure your family’s future, download our latest guide. There’s also a wealth of information for parents on our Biggest Investment Hub.