INVESTMENT TRUSTS: A HIDDEN GEM FOR LONG-TERM INVESTORS
UNLOVED AND OVERLOOKED.
For many investors, the stock market means buying shares in individual companies or investing in unit trusts and exchange traded funds (ETFs). Yet one of the oldest and most versatile investment vehicles available is often overlooked and presently very much unloved: the investment trust.
Investment trusts have been helping investors build wealth for more than 150 years and remain a cornerstone of the London Stock Exchange. They offer access to a broad range of investment opportunities, professional management and unique features that can make them particularly attractive for long-term investors.
An investment trust is a public limited company whose sole purpose is to invest in a diversified portfolio of assets on behalf of its shareholders, much like private equity it often offers investors the chance to invest in a range of opportunities that are otherwise unknown or out of reach to them. Listed private equity companies like HarbourVest Global Private Equity (FTSE-250: HVPE) offers it investors access to over 14,000 companies, whilst for ethical investors the likes of Foresight Renewables Infrastructure Trust (FTSE 250: FGEN) provides shareholders access to a range of assets that support the energy transition.
Unlike open-ended funds, investment trusts have a fixed number of shares that are traded on the London Stock Exchange, just like the shares of any listed company.
Because the fund manager does not have to buy or sell investments to accommodate investor inflows and outflows, they can focus on managing the portfolio with a genuinely long-term perspective.
WHY INVESTORS CHOOSE INVESTMENT TRUSTS.
Professional Management
Investment trusts are managed by experienced investment professionals who research companies, sectors and markets. Investors gain access to expertise that would be difficult and time-consuming to replicate themselves.
Long-Term Focus
The closed-ended structure allows managers to invest patiently without worrying about daily redemptions. This makes investment trusts particularly well suited to assets that require time to mature, such as infrastructure, private equity and property.
The Opportunity to Buy at a Discount
One feature unique to investment trusts is that their shares can trade at either a discount or a premium to the value of their underlying assets (known as Net Asset Value, or NAV).
Buying at a discount means investors may be able to purchase £1 worth of assets for less than £1. While discounts can persist for some time, they may narrow over time, potentially providing an additional source of returns.
Revenue Reserves
Unlike many open-ended funds, investment trusts can retain some income in prosperous years and use these reserves to maintain or increase dividends during more challenging periods. This has enabled several investment trusts to build impressive records of consecutive annual dividend increases. City of London Investment Trust (LON: CTY) has increased its dividend payouts for 60 consecutive years. Several investment trusts currently offer an annual dividend yield above what savers might get in a standard savings bank. That said investment trusts are not without risk.
Share prices can fall as well as rise, and investors may receive less than they originally invested. Discounts to NAV can widen, reducing returns even if the underlying portfolio performs well. Just this month we saw NextEnergy Solar Fund (LON:NESF) putting itself up for sale due to its inability to narrow its discount to NAV, despite a seemingly consistent operational performance.
As with any investment, diversification and a long-term perspective remain important.
WHY INVESTMENT TRUSTS DESERVE MORE ATTENTION.
Despite their long history and numerous advantages, investment trusts often receive less attention than ETFs or open-ended funds. Yet they offer a compelling combination of professional management, diversification, access to specialist assets and features that can enhance long-term returns.
For investors seeking to build wealth over many years, investment trusts represent one of the most flexible and sophisticated investment vehicles available on the London Stock Exchange.
Whether you’re looking for global equity exposure, reliable dividend income, renewable energy infrastructure or access to private businesses, there is likely to be an investment trust designed to meet your objectives.
As always, investors should conduct their own research, understand the risks involved and ensure any investment aligns with their financial goals and personal circumstances.