Five big benefits of investment trusts

Closed-ended investment trusts have a number of structural benefits over open-ended funds, and Laura Foll, co-manager of Lowland Investment Company, a UK equity income trust investing in companies of all sizes, brought these into sharp focus at Sub35’s AlphaBeta Brewery event.

1. Fixed pool

Closed-ended funds have a fixed pool of assets and this means their managers do not have to worry about managing inflows and outflows.
They are not going to receive a redemption request and be forced to sell assets they think will do well over the long term to meet it. Equally, they do not have to pick up assets they are not so keen on at that given moment to invest subscriptions.

2. Long-term view

The fixed asset base also enables managers to take a truly long-term view – to buy and hold investments over the very long term. A good illustration of this is Hill & Smith, a manufacturer and supplier of vehicle safety barriers and speed signs, which was added to Lowland in 2009. Its earnings momentum has since grown significantly.
Churchill China, a pottery manufacturer based in Stoke-on-Trent, was bought in 2004 and held for nearly a decade without real success, until the company moved into the worldwide hospitality market and experienced a massive surge in growth.

3. Revenue reserves

Investment trusts can retain 15% of their investment income every year and hold it in reserve to pay out in poorer years for income generation. In this way, they can give income-seeking investors a smoother ride. This feature makes equity income investment trusts well suited to investors who want a steady source of income.

4. Tactical use of gearing

Most trusts have the facility to ‘gear’ – to borrow money to invest alongside shareholder funds in the hope that investment returns on this outstrip the borrowing costs. Foll explained that Lowland gears and de-gears tactically. It is currently about 13% geared.

5. Independent board

Lowland deploys its gearing with the full support of its independent board. This is another attractive feature of the investment trust structure. Each has an independent board, which governs all the activities and oversees the appointed professional investment manager. Comprised largely of part-time, non-executive directors, investment trust boards hold their fund managers to account and take appropriate steps to ensure the underlying returns are delivered to shareholders.

Watch Foll’s presentation