5 ways investment trusts could help in uncertain times
The year 2017 is already shaping up to be a very interesting one for stockmarkets. Britain’s looming break-up with the European Union - the Brexit - will bring enormous change, and of course the ultimate wild card still hangs over the market: what kind of effect will President Donald Trump’s reign have on the US economy?
03 Feb 2017
Unstructured Learning Time
The year 2017 is already shaping up to be a very interesting one for stockmarkets. Britain’s looming break-up with the European Union - the Brexit - will bring enormous change, and of course the ultimate wild card still hangs over the market: what kind of effect will President Donald Trump’s reign have on the US economy? Stockmarkets rarely rally in the face of political and economic uncertainty. Yet the latest analysis shows that major stockmarkets have rallied as much as 12% since Trump was elected as president.
On home soil there is plenty of trepidation surrounding the effects of Brexit. While Theresa May’s speech in January moved to reassure people that Britain is to have a “comprehensive, bold and ambitious trade agreement” when the clean break from the EU goes ahead, no-one knows what that means for industry - and markets. Interestingly, the FTSE 100 has been reaching record highs lately.
Private investors saving for a secure future might feel concerned about the security of their money this year - and beyond. So how can you remain confident about having money invested through such uncertain times?
The most cautious of investors who find themselves tempted to stash their money where they can see it should remember that as cash does not have the growth potential of other investments, holding excess cash can have a negative impact on real returns. This is likely to get worse with inflation on the rise.
The key for many savers - cautious or otherwise - will be to find an investment vehicle that can provide security and crucially, a stable return over the long term.
Investment trusts could provide both, thanks to many of their special features that are unique to this kind of fund. Investment trusts are described as closed ended investments, and have a set number of shares in the trust in issuance. They are structured like a standard company, but rather than manufacturing goods and services, they make their money by investing in other companies. Your money is pooled with that of other investors and a dedicated fund manager will decide which stocks to purchase - just as their open-ended counterparts.
It’s actually the workings of an investment trust that gives it its special status.
Here are the mechanics that could offer savers stability:
*Investment trusts can hold back up to 15% of income generated by underlying assets each year to build up a reserve to be used to smooth dividend payments in tougher times. In addition, in certain circumstances, investment company boards may 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.
*Investment trusts offer peace of mind that should you want to access your money, you know it is readily available. This is because trusts are traded on the stock exchange and may be bought and sold at any time. However, withdrawals from an investment trust could result in the trust trading at a discount, and so although you can access your investment, its value may be less than the net asset value (NAV) of the fund. Many investment trusts have processes in place which seek to manage the discounts to certain limits.
*Savers looking to grow their money over the longer term can benefit from investment trusts as they are known for offering regular income payments through dividends. These payments - if reinvested - provide a significant boost to the size of your savings pot as they contribute to “compound interest” which is when the returns start earning their own returns.
*Savers looking for a stable return can rest assured that investment trusts offer access to different types of assets at many different levels of risk from a wide choice of funds. Those who are feeling cautious amongst the backdrop of uncertainty can choose a fund at the more cautious end of the risk scale.
Yet long term savers might feel they can accept any potential volatility and choose some funds at the riskier end. That’s because there is plenty of time to ride out any short-term losses and see the value of the investment recover.
When choosing your fund in which to invest you should look at what the fund is aiming to achieve.
*Investment trusts can be “geared”. This is the term that describes the ability for the manager to borrow in order to buy assets. This feature of investment trusts can help them cope with stockmarket volatility - as well as make long term gains. However, gearing can work against you in a falling market.
Investment trusts aren't necessarily for everybody, but they should be considered part of a diversified portfolio. There are several hundred listed investment trusts available to choose from covering a broad range of asset classes and investment strategies. 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.
The Association of Investment Companies (AIC) offers a good source for further information on the full range of investment trusts www.theaic.co.uk.
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 amounts originally invested.
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.
Issued in January 2017 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.