Payouts every year for 40 years: Why investment trusts are back in the limelight
As my colleague Cat Ommanney blogged last week, MRM is delving into young people’s attitudes to money by launching independent research into the average twenty-something’s views on personal finance. This got me thinking about the opportunities out there for young, plucky investors.
Among the few peers of my age who have money to invest, most only have enough money to buy a few company shares. They want to do something a bit riskier than tie their cash up in low interest savings, but aren’t quite ready to meet the minimum investment needed to enter a large fund. Which shares to go for? What if one of the companies goes bust? The danger for someone looking to dip their first toe in the world of investments through shares is that everything relies on those two or three companies thriving.
This is why the recent excitement surrounding investment trusts over the last few weeks has caught my eye. Investment trusts offer a way round this problem because they buy a widespread portfolio of shares and most importantly, spread the risk. Investors acquire shares in the trusts, meaning that those investors with just a small wad of money to invest can experience the benefits of a diversified portfolio without entering into a large fund.
What the press have been saying
The recent move by Alliance Investment Trust to lift its dividend from 7.2 per cent to 9p – the biggest amount in 20 years – has brought the case for investment trusts back to the financial headlines.
At the beginning of the month, Patrick Hosking and Miles Costello at the Times took a look at the performance of investment trusts over unit trusts. In their article, they noted how if an investor had opted to put £100 in to Alliance Trust 10 years ago, this would have grown in value to £163.60.
The Times article pointed out that investment trusts have some of the most impressive records for consistent dividend growth, with figures from the Association of Investment Companies highlighting that eight of them have raised payouts every year for more than 40 years. Quite a performance.
Investment trusts have also been making big headlines in the trades. Max Julius at Citywire summed up the top 10 investment trusts most viewed by readers on the New Model Adviser website. At number one is the oldest trust in the world which started in 1868, F&C’s £1.8bn Investment Trust run by Jeremy Tigue. Mainly focused on UK blue chip shares, this trust pays dividends four times a year and has just outperformed its benchmark thanks to its holdings in private equity, as Rebecca Clancy reported here on FT Adviser.
At Morningstar, Jackie Beard wondered whether investors aren’t missing a trick when only looking at unit trusts or OEICs, with favour for investment trusts gaining her whole-hearted support. Indeed this is something which caused a bit of a debate at Investment Week, where Kyle Caldwell highlighted the ‘dividend wars’ between OEICs and trusts, looking at figures released by Dennehy Weller & Co that revealed 35pc of UK equity income funds cut payouts in 2011.
But why all the hype right now?
For a young or first-time investor, looking at the ups and downs of investment trusts just might be an interesting idea. Investment trusts can borrow money – gearing – to invest which helps in rising markets. They have outperformed open ended counterparts over the last decade, and for risk averse investors this is the key seller.
Many investors also feel they have more efficient structures than open-ended rivals, because of the gearing ability as well as the attraction of share buybacks and new share issues to control discounts.
Another thing which leans in their favour is that they have independent boards that can replace the trust’s manager if it is performing badly. But they are not without their risks – gearing can lead to bigger loses in falling markets.
What will be really interesting to find out from the research we at MRM are carrying out, is at what age and with what amount of money young people start to consider the option of investing in the stock market…. watch this space to find out.