Investment Trusts as part of your income strategy – Q&A
Robin Stoakley, Schroders Head of UK Intermediary, explains why investment trusts could offer an interesting alternative for income seekers as part of a balanced, long-term portfolio.
What are the unique benefits of investment trusts for income investors?
If you are investing for income, an investment trust may provide more stable income payments over time than an equivalent open-ended investment company (OEIC). This is because investment trusts are permitted to retain up to 15% of the income received during any financial year in a revenue reserve, whereas unit trusts and OEICs must distribute all of the income they receive. Holding some income in reserve helps to regularise dividend payments to investors through the ups and downs of the economic cycle – this is called dividend smoothing.
Investment trusts can also typically invest in a wider range of assets than open-ended funds, according to the Association of Investment Companies (AIC). This is because investment trusts’ closed-ended structure and long-term outlook enable them to invest in less liquid assets – such as commercial property , infrastructure or smaller companies– which have the potential to deliver higher returns or greater losses.
What are the main considerations when choosing investment trusts for income?
Deciding which investment trust is best suited to your individual income needs can be a challenging decision given the range on offer and you should consider taking independent financial advice.
A key consideration will be how closely an investment trust fits with your overall income strategy and goals. With the potential to offer a regular, stable income, investment trusts may be well suited to those looking for retirement income, or those requiring income to pay school fees, for example.
At a fund-specific level, points to take into account include: the fund’s investment objectives, the country, region, sector(s ) and companies it invests in, the fund manager’s track record, the level of gearing, the fund’s dividend history and the frequency of pay outs, as well as the ongoing management charge and the price of the shares. Income investors should also check whether the growth of income the investment trust aims to deliver is above the rate of inflation, although there are no guarantees.
What is a typical level of annual income from an investment trust?
Returns will vary significantly between trusts and past performance is not a guide to future performance. However, according to data from AIC, £100,000 invested into the average UK Equity Income investment trust on 1 September 1994 would have generated an initial annual income of £3,265 by 31 August 1995. By 31 August 2014, this annual income would have grown to £8,139. The annual income grew by an average of 5% per year over 20 years, more than 2% above inflation (RPI), which averaged 2.9% over the same period. Of course, it is important to remember that past performance is not a guide to future performance and that the value of investments can go down as well as up. There is no guarantee that investors will get back the amount originally invested.
Can an investment trust deliver both income and growth?
Yes, one of the advantages of investment trusts is their ability to deliver both income and growth. While some investment trusts aim to deliver immediate income, others aim to grow that income over time. And some try to offer a mixture of both income and capital growth. It is worth noting that even an investment trust which concentrates on delivering income has the potential to provide capital growth as a consequence of the rising income it produces.
As with any investment, your capital is at risk when you invest in an investment trust. Past performance is not a guide to future performance and may not be repeated. Furthermore, as investment trusts have the ability to pay income from distributable capital reserves to smooth payments to investors, it is important to note that this can reduce the capital value of the investments in 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
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
We recommend you seek financial advice from a financial adviser before making an investment decision. If you don't already have an adviser, you can find one at unbiased.co.uk or vouchedfor.co.uk
Issued in April 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.
 Shares in investment trusts have a bid price and an offer price. The offer price is the higher price at which you can buy shares and the bid price is the lower price at which you can sell shares. The difference between the two is the bid/offer spread. When demand for shares in an investment trust is low, the bid/offer spread can widen.
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This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
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Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.