15 things you didn't know

Written by MiP

While many investors will reach for an open-ended fund - the more widely used type of fund -many could overlook an important opportunity to include an investment trust. They offer a range of unique characteristics which are attractive to savers looking to invest wisely.

Here are 15 things you didn't know you about investment trusts...

1. Investment trusts are the first collective investment vehicle of any kind. They were designed to suit every kind of investor. Records show that investors in the very first investment trust launched in 1868 were from all walks of life. They included an earl, a farmer, a “married woman”, a leather cutter, an army officer and a flax spinner. And these particular investors came from all over the land, from Edinburgh to Devon, from castles to terraced houses.

2. The world's first investment trust is the F&C Investment Trust, launched in 1868. F&CIT ranks among the best performers - returning 124% over the last five years.

F&CIT has increased its dividend payout every year since 1970. And over the last decade the dividend has doubled, compounding at 7.3% per year compared with an average UK inflation rate of 2.4%.

3. Investment trusts are known as closed-ended funds as they have a fixed number of shares in issue. If you're investing in an ISA - or pension - for the long term, this structure can help. This is because they are not affected by the risk that high levels of redemptions might create a need to sell assets at short notice to meet demand for redemptions, as with open-ended funds.

4. Steady, reliable income is important to many savers. Investment trusts can deliver a steady income to investors, even in times of crisis because they can hold back up to 15% of their dividends during bumper years to keep reserves for any tough times that lie ahead. This ensures investors can benefit from a steady income in any kind of market conditions.

5. With UK inflation at 2.4% and ahead of the Bank of England's 2% target rate, making sure you have inflation-beating returns is crucial. Company shares offer protection because companies can put up the prices of their products at times of rising inflation, and return that to shareholders through higher dividends and capital growth. This should help preserve your capital in real terms over the long-term. Furthermore, according to statistics from the Canaccord Genuity, investment trusts have beaten their benchmarks more frequently than open-ended funds over the medium and long-term. Although past performance is no guidance to future performance.

6. Investment trusts have a range of objectives to suit different types of savers. A trust might be focused on providing income, capital growth or a mixture of the two. An income fund would ordinarily aim to pay a certain level of income and hopefully grow it over time. Such a fund is likely to invest in established businesses with strong balance sheets and excellent prospects for continuing to pay regular dividends that will increase in years to come. If it's a growth fund it will aim to generate a total return from a combination of capital growth and reinvested dividends. Such funds may seek to invest in companies which are growing and are reinvesting earnings to grow the business and therefore might not yet be paying big dividends.

7. By reinvesting any dividends over time, growth is significantly boosted. In fact, this reinvested income generated by an investment trust is the biggest overall contributor to total returns over time because of compound interest. This is the term for earning interest on interest or more specifically in investment terms, generating income from previous income.

8. A list of 21 investment trusts with the longest track record of paying out more dividends each year is published in a “Dividend Heroes” league table by trade body, the Association of Investment Companies. You can find the list on the AIC website: https://www.theaic.co.uk/sites/default/files/hidden-files/AICDividendheroesMar18.pdf

9. Investors can get direct access to illiquid assets, such as property, infrastructure and private equity through investment trusts. This is thanks to their closed-ended structure.

10. In certain circumstances, investment company boards may elect to pay income out of capital. While this can erode the long-term capital returns generated by the funds, many investors who rely on the income are happy to prioritise these short-term income payments over and above capital value.

11. Your investment will have the oversight of a board of directors, responsible to you as a shareholder. The role of directors is to oversee the activities of the manager and to ensure that the objectives of the investment trust are met. They are also responsible for ensuring that expenses, including the investment manager's fees, remain competitive.

12. There are costs associated with owning funds - including investment trusts. Charges eat into savings over time so it's important to pick those funds that are good value for money. The good news is that investment trusts can be cheaper to hold than other types of funds.

13. Setting up a regular savings plan is a sensible option even if you have a lump sum to invest. By investing at regular intervals more shares are purchased when share prices are low and fewer shares are purchased when prices are high.

Should money buy stocks at a lower price, there is a higher return when the market swings back up. Some investment trusts have their own regular savings plans.

14. You can place investment trusts in an ISA using a fund supermarket or platform. The Association of Investment Companies has launched a comparison website to help find the best value fund supermarket to hold your investment trusts. Visit theaic.co.uk

15. You don't have to choose an investment alone. An adviser can find the most appropriate trusts to choose from, and guide you on how much of your money you should invest. If you don't have an adviser you can search for one in your area at unbiased.co.uk.

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