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Trust in the future

JP Morgan Asset Management head of sales and marketing James Saunders Watson on the long-term advantages of investment trusts

Saunders Watson: ‘Key benefits’
Saunders Watson: ‘Key benefits’

Investment trusts are a popular way to access the growth potential of the world’s stockmarkets but, despite their long standing, they have historically been underused in retirement planning. This situation is now changing and perhaps one of the major reasons why investment trusts are well suited for the long-term nature of pension investing is their closed-ended structure.

Unlike Oeics and unit trusts, investment trust managers do not need to sell portfolio holdings to provide liquidity for redemptions. This means they can buy and hold stocks for the long term without worrying about fund flows – bringing a stability that closely aligns them with the long-term goals of most pension investors.

The long-term benefits of lower costs
A relatively low fee structure is another key benefit of investment trusts, especially for longterm pension investors.

Most investment trusts do not charge a front-end fee compared with open-ended funds such as Oeics which typically have initial charges of 3-5 per cent. You will pay a brokerage fee when buying investment trust shares but these are generally only around 1 per cent or less of the amount invested.

What’s more important for the long term is that total expense ratios also tend to be much lower for investment trusts – around 1.4 per cent on average, according to research by the Association of Investment Companies in 2009, but many have TERs below 1 per cent. Figures from Lipper show this compares with TERs closer to 1.7 per cent on average for open-ended funds.

These figures may seem negligible for pension investors but these lower entry costs and lower annual charges mean that more of their contributions will be put to work in the stockmarket. Over many years, these lower charges could bring a significant uplift in returns thanks to compounding.

Investment trusts can bring more diverse opportunities
Investment trusts can also take a broader view of investing, for example, in more illiquid investments sich as small and microcap companies, real estate and even private equity. This is because investment trust managers can hold investments for the long term, with no pressure to sell positions to meet outflows.

These different asset classes bring welcome additional portfolio diversification and return potential to portfolios.

The merits of an independent board and improved access
Investment trusts have an independent board of directors who closely monitor performance, question investment decisions and, if necessary, can force a change in the trust’s investment managers.

This oversight helps ensure consistency for investment trust shareholders and stability of returns throughout the term of their investment – vital for pension investors who may commit their money to an investment for many years.

A lack of accessibility has been another major reason why investment trusts have until recently played a smaller role in retirement planning for most investors. Although the lack of any commission structure has perhaps contributed to a somewhat lower profile than Oeics, their accessibility has been overcome recently thanks to the arrival of Sipps.

Sipps are highly tax-efficient and offer pension investors a cost-effective and flexible way to save for retirement. They also give investors the choice to invest in a wide range of assets and securities, including open-ended funds, closed-ended funds and even individual stocks.

This scope has enabled many investment houses to develop specific investment platforms to allow Sipp investors to access a wide range of potential investments, including investment trusts.

Within retirement planning, investment trusts make a strong long-term case
With the advent of Sipps, the closed-ended structure, lower fees and ability to use gearing of investment trusts can offer a potentially better alternative for long-term savers, especially when you compare their merits with Oeics.

As investment trusts have become more accessible, it is easy to see why pension investors and their advisers are giving more consideration to the long-term advantages of investment trusts during the retirement planning process.


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