Some advisers also point out that investment trust companies, unlike managers of open-ended investments do not need to buy and sell holdings to accommodate the expansions and contractions in fund size which result from investors buying into or selling out of the fund.
The number of investment trusts paying dividends over extended periods highlights their potential to investors looking for a growing retirement income. Many investment trusts have increased their dividends in each of the past 25 years.
And while investment funds can be more risky in the short-term, they often outperform in the long-term. According to the AIC’s Pensions Consumer Guide, investment companies’ long-term average is beneficial for pensions, which it calls the longest financial investment an investor will make.
The AIC report also argues that investment companies offer access to a much wider choice of investments due to their closed-ended structure, such as commercial property, infrastructure and renewable energy. These assets can offer a higher level of income and, it claims, are often better suited to being held in a closed-ended fund like an investment company. The trusts can also include investments which, although often more risky, can outperform in the long-term, such as private equity.
Finally, investment companies can borrow money to make additional investments, also known as gearing. Gearing increases risk, but when used effectively can increase profits.
Are they of interest?
While the investment companies offer long-term returns and a viable option for retirees to invest their pension pots, advisers have pointed out that they are still not as popular as they could be.
A commonly held view is that investment trusts have not become very popular chiefly because advisers do not understand them very well. They are not very confident of the processes and therefore do not recommend them to their clients.
Mr Best advocates this view. “I think the clients are losing out because a lot of the advisers don’t have the confidence and knowledge,” he says.
So what can be done to improve the chances of more investment trusts being added to retirement portfolios? “I think if the AIC did more talks about how exciting they can be and the returns they can get for a client, then that would be helpful to most advisers,” Mr Best says, “It would pass that on to the clients.”
However, advisers and wealth managers also warn of the importance of proper due diligence and understanding the market well before rushing to add investment trusts into a portfolio. Investors should carry out proper research, especially if they are planning to invest their entire life savings in this vehicle.
