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Investment Trusts

Going strong: Investment Trusts stand the test of time

It’s not often that you hear Queen Elizabeth II and investment trusts mentioned in the same breath – but like her majesty, at least 10% of UK investment trusts have been in existence for 90 years or more.

18 May 2016

It’s not often that you hear Queen Elizabeth II and investment trusts mentioned in the same breath – but like her majesty, at least 10% of UK investment trusts have been in existence for 90 years or more.1 And just as Queen Elizabeth II is the world’s oldest and Britain’s longest-serving monarch (having now surpassed the record set by her great-great-grandmother, Queen Victoria), investment trusts too have a long and important history.

The ‘original’ investment trust was formed as long ago as 1868 – the year that Benjamin Disraeli first became Prime Minister and the world’s first traffic signal was installed in Parliament Square. As investors who had made money from the Industrial Revolution and the growth of the railways across Britain looked for diversified homes for their gains, the concept of investment trusts caught on – spreading from London up to Edinburgh.

At that time, interest rates and inflation were low. What’s more, Victorians had relatively few investment options available to them. While today’s investor has almost the opposite challenge, the macroeconomic environment is broadly similar; and although investment trusts have evolved considerably, their appeal remains strong.

Solid track record

As well as having a lengthy history, some investment trusts have delivered consistent returns for investors over the long-term, despite turbulent market conditions. The Schroder Income Growth Fund plc is a classic example. Its share price has outpaced the benchmark FSTE All Share Total Return since inception by more than 1% per year on average since launch*. Over the past five years, this outperformance has widened by 3%, with an annual share price increase of just under 9% compared to the 6% delivered by the FTSE All Share Total Return*. 

 

Q1 2015 – Q1 2016

Q1 2014 – Q1 2015

Q1 2013 – Q1 2014

Q1 2012 – Q1 2013

Q1 2011 – Q1 2012

Share price

-8.7

-9.4

14.7

27.9

3.4

Net asset value

-4.8

14.9

14.3

22.2

4.0

FTSE All Share Total Return

-3.9

6.6

8.8

16.8

1.4


*Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP as at 31 March 2016. Past performance is not a guide to future performance and may not be repeated.

In addition to showing steady share price growth, this fund is on the Association of Investment Companies’ ‘dividend heroes’ list for consistently increasing its dividend to investors over 20 years. Managed by Sue Noffke, its net yield is 4%, providing growth of income above the rate of inflation and capital growth as a consequence of the rising income.

But what is it – aside from the expertise of the professional fund manager – that has enabled an investment trust such as this to survive and even thrive over the long-term, regardless of periods of financial turbulence?

Unique characteristics

An investment trust’s closed-ended structure is an important factor in longevity. Since investment trusts have a fixed amount of shares in issue, if demand increases, the share price simply rises. And given that an investment’s trust’s performance is unaffected by investor asset flows, fund managers can take a long-term view of the market.

In turn, this has enabled them to invest in less liquid assets, such as commercial property – which have the potential to deliver higher gains or greater losses. Unit trust managers, in contrast, have to manage fluctuations in the size of the fund due to inflows and outflows of money by buying or selling assets.

Investment trusts also have the ability to retain up to 15% of the income they receive each financial year, and can use this to regularise dividend payments to investors throughout the ups and downs of the economic cycle. Known as dividend smoothing, this technique has helped many investment trusts gain an excellent long-term dividend growth track record. The benefit for investors, of course, is a relatively steady stream of income – which is particularly useful for anyone using their investment trust dividends to meet specific financial obligations, such as paying school fees.

Elsewhere, fund mangers have the ability to borrow capital as a means to potentially boost the investment trust’s long-term returns – this is known as ‘gearing’. The idea is that if the fund manager identifies a strong investment opportunity but doesn’t have spare cash within the fund, they can borrow money in order to make the necessary investment – without having to sell existing holdings.

As an investor, it is important to understand that while gearing can increase potential returns in a rising market, it can also magnify the extent of losses in a declining market.  Gearing does, however, enable the fund manager to take a truly long-term view – and this is one of the fundamental characteristics of investment trusts, and a significant factor to consider when investing in them.

The long view

Investment trusts specialising in the emerging markets and Asia could be particularly suited to long-term investing because of the higher degree of risk and the potential for short-term volatility. The Schroder AsiaPacific Fund plc, for example, has built a strong long-term performance record by targeting attractive investment opportunities across Asian equity markets and providing investors with exposure to Asia’s superior long-term growth potential.

Since its launch in 1995, the fund has averaged 6.2% annual share price growth, compared with 4.1 % on the benchmark MSCI AC Asia Ex Japan (NDR). Moreover, Matthew Dobbs, who has managed the Schroder AsiaPacific Fund plc since day one, has been involved in Asian markets for over 30 years – making him a true proponent of taking the long view.

 

Q1 2015 – Q1 2016

Q1 2014 – Q1 2015

Q1 2013 – Q1 2014

Q1 2012 – Q1 2013

Q1 2011 – Q1 2012

Share price

-7.4

26.0

-9.7

14.7

8.2

Net asset value

-6.2

26.1

-8.8

16.9

3.3

FTSE All Share Total Return

-9.0

24.4

-6.1

12.4

-6.8

Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP. Past performance is not a guide to future performance and may not be repeated The trust holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.

In summary, with the ability to deliver both income and growth, if desired, investment trusts could play an integral role in a long-term investment portfolio. In fact, investment trusts could typically be suited to investors who have a less immediate time horizon since fund managers’ investment strategies’ tend to be based around long-term views of the market.

What are the risks?

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Schroder Income Growth Fund plc

  • Trusts that invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies. 
  • The trust will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
  • As a result of the fees and finance costs being charged partially to capital, the distributable income of the trust may be higher, but the capital value of the trust may be eroded. 
  • The trust may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

Schroder AsiaPacific Fund plc

  • Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature.  Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.
  • The trust holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.
  • The trust Invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts that invest in larger companies.
  • The trust may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
  • Investments such as warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the fund.

Schroders launched its first investment trust in 1924 and our range provides investors with access to a range of nine distinctive investment opportunities including: UK and Japanese equities, Pan-Asian equities and property. To find out more, please visit www.schroders.co.uk/its

Important information:

Schroders has expressed its own views and these may change. We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you do not currently have a financial adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing, refer to the latest Key Features document, available at www.schroders.co.uk/investor or on request. For further explanation of any financial terms, visit www.schroders.co.uk/glossary. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Issued in May 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK10728

http://www.schroders.co.uk/en/uk/private-investor/insights/investment-trusts/investment-trusts--a-vehicle-fit-for-volatile-times/

http://www.schroders.co.uk/en/uk/private-investor/insights/investment-trusts/investment-trusts-as-a-portfolio-diversification-strategy/

http://www.schroders.co.uk/en/uk/private-investor/insights/investment-trusts/investment-trusts-as-part-of-your-income-strategy--qa/

http://www.schroders.co.uk/en/uk/private-investor/insights/investment-trusts/understanding-risk-around-investment-trusts/