Golden Oldies: Are Investment Trusts Having a Renaissance?

Nicola Board, the Head of the Company Secretariat at Maitland Fund Services, provides a broad overview of investment trusts, pointing out that they are a well-supervised asset class which is well-regulated and offers many benefits for investors.

Sometimes referred to as one of the fund management world’s best-kept secrets, investment trusts were first established in 1868 as a way of allowing investors with more modest means access to the stock market.

These old-timers of the investment world rarely make for dramatic headlines but are nonetheless a core holding for many professional and amateur investors.

Also referred to as investment companies or closed-ended funds, investment trusts are vehicles with shares that are traded on a stock exchange. Investors’ money is pooled and invested by a fund manager into underlying assets. Different trusts focus on different investment criteria and sectors and, therefore, have different strategies. Some have very wide remits, while others are more focused.

Buying investment trust shares can be viewed as a cost-effective way to benefit from the experience of a professional manager, without the hefty price tag attached to appointing your own investment portfolio manager.

According to the Association of Investment Companies (AIC), investment trusts raised a record £15.1 billion of new money in 2021, surpassing the previous high of £10.2 billion, set in 2014. Investment trust assets in the UK amounted to £265 billion at the end of May 2022.

This naturally leads us to ponder what it is about the current market environment that is making investment trusts more appealing at present, caveated by the fact that these vehicles should be viewed as investments for the longer term

‘A rising tide lifts all ships’ is a phrase that aptly captures much of the post-2008/9 investment landscape, with ETF-based investing making a strong case for itself in the age-old active versus passive debate. However, the coronavirus pandemic, coupled with the war in Ukraine, ushered in a new period of uncertainty, with the first half of 2022 characterised by rapid inflation. This has unsettled markets and resulted in a general downturn, arguably making the idea of a professional hand on the tiller more appealing.

Investment trusts are managed by experienced investment managers, often with a long track record, who are supported by teams of analysts who help to identify the companies with the most potential in any given sector. Investors can get exposure to a broad range of investments in a single vehicle, diversifying their investment risk and allowing access to underlying investments – like direct property, for example – that they may not otherwise be able to get exposure to.

These trusts also sometimes enter periods where they are cheap compared with the value of the underlying assets, presenting buying opportunities for the savvy investor. Net asset values (NAV) are calculated regularly, in many cases daily, and provide an objective valuation of the underlying assets. The share price will generally relate to NAV, but it is also subject to the vagaries of broader market sentiment.

When a trust’s share price is above its NAV, it is described as trading at a premium. When the NAV is higher than the share price, it is described as trading at a discount. There are potential advantages to both scenarios depending on whether an investor wants to buy or sell.

Unlike unit trust and open-ended investment companies, investment trusts have a fixed share capital which can only change if the trust issues new shares or buys back its own shares, whereas OEICs/unit trusts create and cancel units to meet demand. This has sometimes led to situations where investor capital in OEICs and unit trusts becomes locked in during times of market stress – a problem not faced with investment trusts due to the fact that the shares are traded on the London Stock Exchange.

Behind the scenes – the differences for administrators

Investment trusts are not ‘trusts’ in the legal sense of the word but instead are established as publicly listed companies whose shares are traded on a recognised investment exchange , such as the London Stock Exchange.

This means that, like any UK-listed plc, they are required to appoint a suitably qualified company secretary, in addition to appropriately qualified fund accountants. Broadly, a company secretary ensures that the board of directors and the company comply with their legal, regulatory and statutory obligations.

Under UK law there are certain obligations that all companies must comply with, from producing accounts and filing them with the registrar of companies to maintaining the registers of directors and minutes of board and shareholder meetings amongst other things.

An investment trust is also governed by its ‘articles of association’, which are the internal rules by which the company operates. These are detailed in nature and include, for example, the process to appoint, retire and remove directors, the number of directors required to form a quorum at meetings, powers of the board, borrowing powers and details around the rights of different share classes.

As listed companies investment trusts are required to comply with prescriptive rules issued by the Financial Conduct Authority which are designed to ensure the integrity of the markets. These cover a broad range of areas, such as the publication of interim/annual results within a specified timeframe, the requirement to issue regulatory announcements in relation to certain corporate activity, as well as specific criteria that need to be included in published documents like prospectuses, circulars and annual/interim reports. They are also required to adhere to certain tax rules which affords them the benefit of not having to pay capital gains tax on their capital profits.

Layered on top of the legal, statutory and regulatory obligations is a requirement to ensure appropriate governance is in place, with the focus on good corporate governance higher than ever on investors’ agenda.

The many benefits for investors, coupled with the multiple layers of regulation, make investment trusts a fascinating and well-supervised asset class bound to last another 150 years.