Phil Wickenden: Investment trusts deserve our attention

Though there have been some fairly hair-raising moments for investors over the past decade, it is interesting to note that those who invested regularly in investment trusts in the 10 years leading up to the financial crisis, then withdrew the natural income in the 10 years after, have virtually quadrupled their money.

These kinds of headline numbers alone demonstrate how well investment trusts can serve clients in their retirement planning.

Pension freedoms have blown away the line in the sand between the accumulation and decumulation phases.

With two thirds of us now apparently opting for drawdown, investments need to work harder and for longer. Those out-and-out growth funds can be held for considerably more time than they used to be, and lower-risk options can stay in the bottom drawer for longer too.

One of the biggest mistakes investors can make is underestimating the level of risk they need to take to keep their pot growing sufficiently to keep pace with inflation and fund what is likely to be a lengthy retirement.

Investment trusts have unique features that make them particularly well-suited to saving for retirement and then drawing an income from the same investments.

A really good one utilises its natural advantages with a clear objective and strategy, consistently delivering – or over-delivering – on its promises.

Of course, costs are an important and obvious consideration for any investor, but it is also important  that advisers look for a trust with a differentiated strategy from its peers.

Gearing – borrowing money to make additional investments – is arguably the biggest benefit of the closed-ended structure for those in the accumulation phase.

Although gearing can make investment trusts more volatile in the short term, the ability to deploy it is something that has enabled them to generally beat the returns from open-ended funds over the long term.

The permanent capital structure is another big benefit for those saving for retirement, because it affords managers the freedom to focus on growth, rather than managing inflows and outflows.

For income seekers, investment trusts have another significant advantage: they are able to retain up to 15 per cent of their income each year to keep paying and growing their dividends, even in volatile markets.

This allows managers to commit to a progressive dividend policy, and some trusts have notched up 50 or more consecutive years of dividend growth. Worth thinking about.

Phil Wickenden is an independent consultant

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