The ability to gear is another major benefit of using closed-ended funds. Mr Smith explains: “Gearing allows you to generate additional income and also a bit of capital over time – useful when yields are still low, even on high quality equities.”
London-based financial planner Dennis Hall, managing director at Yellowtail, believes the ability to better manage inflows and outflows is worth noting.
“I class a decent investment trust as a very low turnover fund – almost a buy-and-hold approach. They are somewhat insulated from the day-to-day buying and selling of shares. So, even if investors are selling a manager’s fund, they can retain the underlying assets.”
Mr Smith also highlights the generally lower costs of investment trusts versus Oeics, which, when compounded over a long timeframe, can make a significant difference to performance.
“Large capital inflows can grow an Oeic quicker and therefore the annual management charge per shareholder comes down. But it can also make it harder to manage. Large outflows can lead to forced selling to gain liquidity in order to honour redemptions.”
Mr Sketch notes that specialist ITs can bring investors diversification benefits, especially where niche areas, more lowly correlated to equities, are sought.
“Liquidity matters a lot at the moment. In part, this reflects that a lot of dividends from the UK stockmarket come from about 20 shares – that doesn’t give much room for diversification, and few of those stocks look very cheap today.
“More generally, diversifying an equity-based portfolio is always important, but it is harder than it used to be, most obviously because cash and mainstream bonds are the most obvious diversifiers and they offer very low returns.”
Sam Shaw is a freelance journalist
INVESTMENT TRUSTS
JARGON BUSTER - What do the terms mean?
• Closed-ended - A closed-ended investment company has a fixed number of shares in issue at any one time. These are traded on the stockmarket but has no impact on the underlying portfolio.
• Discount - The amount, expressed as a percentage, by which the share price is less than the net asset value per share.
• Dividend - Income from an investment in the shares. Dividends are usually paid twice a year but can also be paid quarterly or monthly, but not all investment companies pay dividends.
• Gearing - A way that investment companies can magnify income and capital returns, but also magnify losses. It usually means borrowing money to buy more assets in the hope it makes enough profit to pay back the debt and leave something extra for shareholders.
• Illiquid Assets - Investments that can’t be sold at short notice, examples include private equity, property and venture capital.
