Record issuance of investment company shares during the first half of 2017 has propelled industry assets to an all-time high of £167.9bn.

Ten new initial public offerings raised £1.5bn, while secondary issuance reached £3.3bn – a record over a half-year period.

The closed-end structure holds benefits for a range of investors: gearing (borrowing money to invest alongside shareholders’ capital) can supercharge returns for younger investors with a long investment horizon, while the ability to smooth dividend payments is a boon for income-seekers in retirement.

‘People who discover investment trusts and invest in reputable ones (and there are virtually no disreputable ones) will rarely if ever regret it,’ says John Newlands, founder of Newlands Fund Research.

‘By doing so they are joining a sort of club in which members, or rather shareholders, are stakeholders, however modest, in an incredibly worthwhile enterprise.’

1. BEGINNER TRUSTS

For beginners dipping their toes in the world of investment, experts recommend both UK and global trusts.

‘Don’t be too specific about sector or geographic location, and don’t be misled by articles suggesting you can afford to invest in far-flung locations or esoteric sectors just because you can take a longer-term view,’ says Francis Klonowski of Leeds-based Klonowski & Co. ‘A simple, well-diversified trust will include some of those areas, but have much else besides.’

Like charity, investing often begins at home, so you could start with 60% in a UK equity income trust, like Finsbury Growth & Income (FGT). ‘Reinvested dividends should give a steadier overall return than growth-orientated funds that tend to invest in smaller companies and can be more volatile,’ says Klonowski.

Add a global trust that excludes the UK, such as Monks (MNKS), part of the Baillie Gifford stable, with the other 40%.

This 60/40 approach works whether you are investing a lump sum or saving regularly. Newlands recommends drip feeding money into markets and many trusts have regular savings schemes from £50 per month.

2. TRUSTS FOR MEDIUM-TERM GOALS

Investment trust shares can trade at a discount or premium to the value of underlying assets, and those saving for a medium-term goal, like school fees, could consider buying into a growth sector on a decent discount.

‘There are some great managers in the smaller companies space with strong long-term returns and you can pick some up on double-digit discounts,’ says Monica Tepes, investment companies research director at Cantor Fitzgerald.

She likes BlackRock Smaller Companies (BRSC), BlackRock Throgmorton Trust (THRG) and Schroder UK Mid & Small Cap (MCP).

Newlands favours listed private equity trusts, like ICG Enterprise (ICGT), also on a double-digit discount, for more adventurous investors.

These sectors can be choppy, so be aware of gearing and consider how you will manage your investment as you approach the time you need the money.

‘Many investment trust managers use gearing to enhance performance, which can then exaggerate losses in falling markets,’ says Jim Harrison, a director at Master Adviser. ‘Invest for at least five years and look at the share price and total return in 2007/09 so you’re not just considering returns in a bull market.’

3. TRUSTS AS SATELLITE HOLDINGS

Specialist investment trusts make good satellite holdings for investors with portfolios of open-ended funds.

‘Investment trusts are excellent vehicles for diversifying portfolios and gaining exposure to more illiquid or specialist markets – infrastructure and alternative sources of fixed income, such as peer-to-peer lending and asset-backed securities,’ says Harrison.

All infrastructure trusts are trading on a premium at present – sometimes a double-digit one – but experts point to the likely conservative nature of net asset value calculations: discount rates used to value infrastructure assets have fallen much less than yields on other assets and remain close to levels seen a decade ago.

After a five-year absence, asset manager 7IM has re-entered the sector, using recent fundraisings as an attractive entry point into HICL (HICL), BBGI (BBGI) and International Public Partnerships (INPP).

Tepes likes alternative energy trusts, like NextEnergy Solar Fund (NESF) and Greencoat UK Wind (UKW), as satellites, while Gavin Haynes, managing director of Whitechurch Securities favours trusts like F&C Commercial Property (FCPT) for illiquid investments like property. The closed-end structure means managers will never be forced into a fire-sale of assets at knock-down prices to meet redemptions.

4. INCOME-GENERATING TRUSTS

Investment trusts can work well for income-seekers not least because trusts can hold back 15% of dividends generated by the underlying portfolio each year.

‘This can be used to supplement dividends in future years should the income disappoint due to dividend cuts,’ says Haynes. ‘It can prove an excellent way for trusts to build long records of dividend growth.’

Diane Weitz, a director of Ashlea Financial Planning in the Cotswolds, points to many trusts’ history of more than 40 years’ rising income.

Among them are UK equity income trusts City of London (CTY) and JP Morgan Claverhouse (JCH), which have increased their dividends for 50 and 44 years respectively.

Weitz also likes F&C European Assets (EAT), which is designed to yield around 6% and generate capital growth.

Newlands tips equity income and growth trusts for retirees, such as Edinburgh (EDIN), Perpetual Income & Growth (PLI) and Temple Bar (TMPL).

‘That way you can draw a very decent income of say 3% per annum to pay for the groceries while having the expectation of longer-term and, extremely importantly, potentially inflation-beating capital growth,’ he says. (JH)

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