Investment Trusts

Navigating Investment Trusts: How best to invest

A year of many historical anniversaries, 2016 marks 420 years since the death of Sir Francis Drake, the first Englishman to circumnavigate the globe. On board his ship, the Golden Hind, expert sailors would use compasses, log lines and maps to safely guide the crew to their final destination, often through unfamiliar territories.

Deciding how, why and where to buy an investment trust can often feel like entering uncharted waters. The range of funds on offer makes it a daunting prospect and the jargon involved sometimes gives investment trusts an air of complexity. But investing in them is more straightforward than it might first appear.

Choose your path

Before getting into fund selection, anyone new to investment trusts will need to consider the different ways of investing in them. These include:

  • Without investment advice. Since investment trusts are traded on the stock exchange, they can be bought without investment advice through investment trust managers and fund supermarkets.
  • With investment advice. Investment trusts can also be bought through financial advisers, stockbrokers and wealth managers – and at Schroders, we always recommend you seek investment advice from a professional before making an investment decision.

You may also want to consider investing through a wrapper scheme.Also known as share plans, investment schemes and savings schemes, wrappers include pension schemes and ISAs. According to the Association of Investment Companies (AIC), they can be a cost-effective way to invest in the stockmarket on a regular basis. This is because the manager will typically buy shares for all the monthly investors within the wrapper scheme as a bulk deal, thereby reducing the dealing costs.

Tax matters

Certain wrappers, such as ISAs, are also tax-free – and this is another important aspect of deciding how to buy an investment trust, since many have a long-track record of paying increasing dividends.

In the 2016 budget, UK Chancellor of The Exchequer, George Osborne, announced significant changes to the way that dividend income earned from stockmarket investments, including investment trust shares, is taxed:

Tax bracket

Previous dividend income tax rate

2016/2017 dividend income tax rate

Basic rate



Higher rate



Additional rate



Source: HMRC as at May 2016.

At first glance, the new system, which has been in force since 6 April 2016, might seem like bad news for investors. But the Chancellor had a sweetener up his sleeve: a tax-free dividend allowance. This enables shareholders to receive £5,000 a year tax-free income – in addition to any existing tax shelters, such as ISAs.

So, for investors who receive share dividends totalling less than £5,000 per year, there will be no tax to pay – whether they’re a basic, higher or additional rate taxpayer. Given the multi-year dividend growth delivered by certain investment trusts, however, if you feel you may go over the new £5,000 threshold now or in the near future, it may be worth considering using a tax-free wrapper such as an ISA to hold these investments. The maximum amount that can be invested in an ISA for the current tax year is £15,420.

Investment amounts

Away from tax, investors have a few more considerations to make when navigating their way through the world of investment trusts – including whether to invest in a lump sum or via regular payments.

A key feature of investment trusts is the ease with which regular investments can be made. Starting from as little as £20 per month in certain investment trust wrapper schemes, regular saving, which is sometimes known as ‘pound-cost averaging’ is, according to the AIC, a good way of helping to reduce the risks involved with stockmarket investing.

This is because buying at regular points throughout the year can help smooth any stockmarket volatility – times when the price is higher will likely be balanced out by lower prices at another time. Some wrapper schemes may also allow investors to make occasional top-ups to their holdings, starting at around £50, which provides the opportunity for more shares to be acquired when the price is low.

Costs and returns

When considering how to save via investment trusts, cost will inevitably be a factor. From the cost of financial advice to dealing costs and trust-specific charges, there are many aspects to consider and benefits to weigh up. Financial advice, for instance, can seem expensive on the surface, but it has the potential to save you money over the longer term.

Dealing costs are an inevitable part of buying shares, including investment trusts. Points to be aware of include: fees paid to a broker if you choose to use one, the difference between the price you can buy and sell investment company shares for – known as the dealing spread – and stamp duty (typically 0.5% for UK-based investment trusts).

Every investment trust will also incur costs that are passed on to the investor. These include management fees and possibly performance fees paid to the professional fund manager, as well as charges that cover the day-today running costs of the fund. The total cost – which should be outlined in the fund’s annual report – will vary depending on which investment trust you choose, and how much you invest.

Offsetting the costs of investment trusts is their potential to deliver attractive returns for investors. While past performance is not an indication of future performance, data released by the AIC and Morningstar in March 2016 showed that a £100,000 investment made on 31 December 1995 in the average UK Equity Income investment company would have generated an initial average annual income of £3,826 within the first 12 months, growing to an average annual income of £8,993 by 31 December 2015. 

Over that twenty-year period, the annual dividend growth was 4.6%, meaning that the average investor would have received a total of £124,548 dividend payments from this portfolio. In addition, the capital value of the portfolio would have grown to £215,874. When combined, that return would more than cover the cost of the average semi-detached house in the UK today, or rather startlingly, nearly the cost of raising a child from birth to the age of 21.

Investment goals

The final piece of the puzzle when selecting which investment trust is right for you is matching the remit of the fund to your investment goals and objectives. While some investment trusts aim to deliver immediate income, others, such as the Schroder Oriental Income Fund, aim to grow that income over time.

In addition, some investment trusts, such as the Schroder AsiaPacific Fund may specifically target capital growth, while others, like the Schroder Income Growth Fund, offer a mixture of both income and capital growth. And 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.  

Whether you are looking for income, capital growth or a combination of the two will depend on what you want to use your investment returns for, as well as your risk tolerance and life stage. For example, investors looking for retirement income to help cover the costs of living, or those requiring income to pay school fees, may prefer an investment trust that focuses on delivering regular, stable income, since they are reliant on that income to meet near-term financial obligations.

Conversely, someone building up a nest egg to buy a dream property or looking to protect their savings from the impact of inflation will likely want to focus more on capital growth. A combination of income and growth, meanwhile, can be appropriate for a wide range of different investors who are willing to forgo a portion of their current income in order to provide for potential future growth.

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.
  • Funds that hold investments denominated in currencies other than sterling are subject to exchange rates fluctuations and this may cause the value of these investments, and the income from them, to rise or fall.
  • Funds that invest solely in the companies of one country or region can carry more risk than investments spread over a number of countries or regions.
  • Funds which invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies.
  • As a result of the fees being charged partially to capital, the distributable income of the fund may be higher, but the capital value of the fund may be eroded.
  • The fund 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.
  • Potential 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.
  • Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting.

Next steps

At Schroders, we believe the best way to determine your investment goals, and therefore which investment trust is right for you, is by seeking professional financial advice. If you don't already have an adviser, you can find one at or

And if you’d like to learn more about investment trusts, see the Schroders Investment Trusts knowledge centre – built to help you make more informed investment decisions.

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

Important Information
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.

Before investing, refer to the latest Key Features document, available at or on request. For further explanation of any financial terms, visit

Issued in May 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.