How investment trusts could help with these market threats

The world of investing is never without concerns, even for the most seasoned investors. Here are five concerns and how investment trusts could help...


1. A General Election in June

News of another general election had an immediate impact on the UK stockmarket. Theresa May’s announcement that another election is set for June created market jitters with the FTSE 100 index suffering its worst day since the Brexit referendum.

However, it's important not to panic because of short-term fluctuations. Whatever the outcome of all the uncertainties on the horizon, it’s important to remember to take a long term view and try to ignore the short term noise. Stockmarkets are unpredictable at the best of times - and can move sharply in both directions. As long as you have a well-balanced portfolio you should be able to handle any market conditions. For long-term savers there should be plenty of time to ride out any short-term losses and see the value of the investment recover.

There are certain investments that are potentially capable of weathering all sorts of market conditions. Investment trusts could offer a steady income whatever the state of the markets, thanks to their unique ability to hold back up to 15% of income generated by underlying assets each year to build up a reserve, which could be used to smooth dividend payments in tougher times.

In certain circumstances, investment company boards may also elect to pay income out of capital. While this can erode the long-term capital returns generated by the funds, many investors are happy to prioritise short-term income payments.

2. “Sell in May and go away – come back on St Leger day”.

This old saying means, “come out of the stockmarket in May and go back in in September – the month when the St Leger takes place”. This mantra was first coined in the days when many City workers left their desks to attend events such as horse-racing at Epsom, cricket at Lord’s and rowing at Henley, before returning to work in September.

The “sell in May” debate – based on expectation of seasonal decline in the markets – highlights the difficulty and danger of trying to time the market for private investors. Although of course past performance should not be used a guide to future results, figures show on average, annual returns were 9.2% for those who remained invested throughout the year rather than 8.1% for summer quitters[1].

Investment trusts offer their own built-in ability to time the market should the fund manager see an opportunity. If managers think there is value in a particular market, they can borrow money to use for further investments. This is known as “gearing”.

In a rising market, returns from an investment trust can be magnified because gearing means managers are better able to take advantage of rising share prices.

However, when share prices fall, the losses of geared funds can be exaggerated.

3. Global political unrest

With Donald Trump’s unpredictability and elections ahead in the UK, Germany and Italy,  it’s understandable that savers are concerned about investing in any major stockmarket.

Whatever the outcome of all the uncertainties on the horizon, it’s important to remember that historically equities outperform cash. With inflation on the rise and interest rates so low, it’s crucial to keep money working hard.

Investment trusts are closed-ended funds, which means they have a fixed number of shares in issue. That can help investment trust managers take a long-term approach to fund management and look through short-term stockmarket volatility. This structure means the investment trust manager will not be forced to sell the fund’s underlying assets to meet redemptions, as may be the case in some open-ended funds. Forced selling can result in losses by the investor if you sell at a lower price.

4. Is backing only well-known stocks a safe bet?

A new study reveals that 57%[2] of investors looking to buy shares over the next 12 months admit to preferring well-known UK brands such as supermarkets and banks.

It’s important to vary the portfolio so it’s diversified enough to cope with any falls in any particular industries. By investing across a variety of different sectors, asset classes and regions, you can spread the risk much wider than if all your investments are concentrated in a single area.

Investment trusts offer exposure to the best-known names as well as lesser-known firms with huge growth potential in specialist areas.

5. Are alternative investments worth considering?

Diversification should be at the heart of every portfolio. The idea is that if one investment has a bad time you should have another which will do well – so they counter-balance each other.

To make sure a portfolio is spread across asset classes you can include alternative investments, such as property, private equity, infrastructure and hedge funds. These could all prove an invaluable contributor to diversification and returns – both growth and income, however it’s equally important to understand the risks associated with alternative asset classes, which can be more volatile than traditional ones.

Property is a favourite among many. REITs or real-estate investment trusts are closed-end companies which are listed on the stock exchange. This means that they are easily accessible to investors and can provide a liquid way for them to invest in property holdings. You can place your clients’ money in the hands of a fund manager who runs a fund which invests in a number of different REITs. This way your clients’ money is more diversified, spreading the risk across a number of properties rather than relying on the success of one or two.

Investment trusts are well-suited to alternative sectors because the assets in which the trust invests are sometimes too illiquid (hard to buy and sell) for an open-ended fund. This is the case with the commercial property and infrastructure, for example.

As with all investments, it is important to remember that the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.

What are the risks?

  • 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.

Important information: 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. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

  • 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.

Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

[1] Source: Seven Investment Management (7IM), as at April 2017

[2] Source:  Consumer Intelligence among 1,026 adults in February 2017 on behalf of Investec Wealth & Investment

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Please remember that 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.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.