Investment Trusts

For investors trying to avoid deemed disposal, there aren’t too many options available. One of them is investment trusts, some of which hit the news last week after a slump in their value. So what are investment trusts and why was their such a big slump in their value?

What is an Investment Trust?

Investments Trusts are set up as companies that are traded on the London Stock Exchange. They are ‘closed-ended’ investments, meaning that they issue a fixed number of shares that can be bought and sold. In comparison, a unit trust (your typical fund) is ‘open-ended’, which can issue units at any time to satisfy demand.

An investment trust is priced differently too; the value of the assets held is called the Net Asset Value (NAV), usually expressed as pence per share. If  an investment trust has £1 million worth of assets and 1 million shares, the NAV is 100p. If it is trading at less than the NAV, it is said to be trading at a discount. If it is trading at more than the NAV, it is said to be trading at a premium. Just because you buy at a discount doesn’t mean that you are guaranteed to make a profit on your investment once it goes back to par. The trust may never get back to par.

Investment Trusts can also borrow within the trust, something known as gearing. This amplifies the gains or losses that can be made within the trust due to the increased level of risk. They can also invest in unlisted companies that can’t ordinarily be purchased on the stock exchange.

And for some Irish investors, they are taxed under the CGT regime and not the Exit tax one, so they avoid deemed disposal. Any dividends paid out from the trust are also subject to income tax, PRSI and USC.

Do Investment Trusts generate higher returns?

An Investment Trust is an actively managed fund, so it has a completely different investment philosophy than a passive indexed fund. This means that the fund manager can make their own decision on what stock they own and what percentage weighting they hold in that company. They are not restricted to following a particular index.

And when they get it right, it can be spectacular. One of the best known investment trusts, Scottish Mortgage, returned 111% in 2020, benefitting from their heavy position in Tesla, which made up 13.4% of the trust last July. Compare this to the MSCI World Index which holds just 1.1% in Tesla or the S&P 500 which only admitted Tesla last December and the car company makes up 1.9% of the index.

As we always say, risk and return are related, so with greater returns, comes increased volatility. With fears over future inflation over the last few weeks, we have seen sell offs in the markets and as a result Scottish Mortgage saw a decline of 20.6% in 3.5 weeks. Over the same period, the MSCI World Index was marginally up at 0.16% and the S&P 500 was up 1.14%.

More concentrated

Investment Trusts tend to be more concentrated, holding less companies in their portfolio. Scottish Mortgage for instance, holds just 48 stocks with the top 10 holdings accounting for 48%, with Tesla currently making up 8.9% of the portfolio. So when Tesla fell by 30% recently, it is going to have a bigger impact on the NAV of the investment trust. Another investment trust, Edinburgh Worldwide holds 99 stocks in its portfolio, with the top 10 making up 32% of the overall holding.

By comparison, the MSCI World Index holds 1,600 different stocks with the top 10 making up 17% of the overall holding and the S&P 500, which actually holds 505 companies and its top 10 makes up 29% of the overall portfolio. With more diversification comes less risk and less ups and downs.

Investment Trusts have been around for a long time and people will favour them for the tax treatment but they should not be compared like for like with a passive index as they are completely different. They are less diversified and more volatile, it is important to be aware of this before you invest.


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Steven Barrett

15 March 2021