SIT's Sherry-Ann Sweeting on why investment trusts can be ideal vehicles for investors seeking global exposure
In the early days of the industry, many investment trusts were set up with broad-based sectoral and international mandates. Today, ‘global’ investment trusts account for well over a third of the total assets of all UK-based conventional investment trust companies (AIC 30 April 2010) with ‘global growth’ by far the largest of all the investment trust company categories.
There are a number of critical elements that can make investment trust companies in general, and global growth trusts in particular, the vehicle of choice for investors.
Closed-ended
A key feature is that investment trust companies are closed-ended. This closed-ended structure allows fund managers to deploy a long-term strategy without the need to sell assets to meet short-term spates of redemptions. Fluctuations in both inflows and outflows of investor money with the ensuing requirement to buy or sell in what could be unfavourable market conditions are hard for fund managers to predict and can be detrimental to performance.
While investment trusts in general tend to be among the most cost-effective of collective vehicles, global growth investment trusts in particular have very low management charges. 68% have TERs under 1%, TERs can be as low as 0.4% and the average TER of the sector is 0.80% (AIC, May 2010). In comparison for example, on average Oeics and unit trusts have TERs of over 1.5% (average global growth TER is 1.6% – IMA, May 2010). The higher the charge, the greater drag on performance for the investor. Cost differences applied every year add up over time.
Investment trust savings scheme charges also tend to be very low. Investment plans are offered by most global growth investment trusts, including Scottish Mortgage, F&C, Witan and The Scottish Investment Trust. Typically, they have no initial or annual charges and some have no purchase or sale charges.
RDR-ready
The requirements of the forthcoming FSA Retail Distribution Review (RDR) mean the financial services industry is beginning to move away from commission as a form of remuneration. While open-ended unit trusts and Oeics routinely pay commission to the financial advisers who recommend them, investment trusts rarely, if ever, do. Not only is this one of the reasons why ITs remain such low-cost vehicles but also, as they have never relied on commission in the past as a means of selling themselves, ITs can be viewed as among the most RDR-ready investment vehicles.
The ability to gear
Unlike open-ended funds, investment trusts have the potential to enhance returns through gearing (borrowing). Investment trusts can borrow money in order to buy more assets, ideally at appropriate and advantageous times. Gearing is beneficial in a rising market but can be detrimental in a falling market. The ability to gear may be particularly advantageous to global investment trusts with their potential to access more numerous growth opportunities than a more specialised fund.
Excellent long-term dividend growth record
Dividends can be hard to obtain from overseas shares as some countries / overseas companies historically have not viewed payment of dividend income as a priority, a situation further hindered by the recent economic crises.
However, for the investor looking for income, investment trust companies in general, and global growth in particular, have an enviable track record of dividend increases, some having increased their annual dividends for over 40 consecutive years. Out of the top 10 investment trusts with the longest record of year-on-year dividend increases, seven are global growth. (AIC February 2010)
Furthermore, investment trusts can retain up to 15% of each financial year’s income from the underlying investments and transfer this amount to their revenue reserves – in contrast with most open-ended funds, which are required to distribute all their income each year. These revenue reserves may be built up in good years and can be used to boost dividends paid to shareholders in poorer years. The effect is investment trusts can and do, to some degree, smooth out the payment of dividends over a period of time.
Independent boards
Another strength lies in corporate structure. Investment trusts are governed by independent boards of directors whose duty is to look after the interests of the shareholders (ie investors). These boards have the ability to move investment management contracts and change managers and over the past few years have shown an increasing willingness to do so if unhappy with the manager’s performance.
Increased differentiation within global growth
There has been much activity in the global growth sector as fund managers and boards work to differentiate their trusts. Although possible to make the case 10 years ago that several of the bigger international trusts were too similar in investment style and operation, this is not the case today. Some focus on “unconstrained” stock selection (ie no “index hugging” and a concentrated portfolio of stock selections) while others offer a “fund of funds” model. Some have geared equity exposure while others are explicitly capital preservation entities.
Easy access through simple, flexible products
Like other equities, investment trust shares can be bought through stockbrokers or share dealing firms or services. However, they can also be bought through investment trust savings schemes which include tax-efficient Isa and Sipp wrappers. Opening a scheme can be simple and does not involve complex processes.
There is usually no maximum ceiling to either lump sum or regular investment (the exceptions being the regulated Isa and Sipp limits) and the schemes are extremely flexible and accessible.
There are a number of good reasons which demonstrate that investment trusts, particularly those categorised as global growth, can be a compellingly attractive option for investors looking to obtain overseas exposure. The recent launches of overseas and global funds as closed-ended rather than open-ended entities could be said to support this view.
Sherry-Ann Sweeting is marketing manager of SIT Savings
