“The revenue reserve shows the undistributed income that the company keeps as reserves and the dividend cover will show the number of years that the current revenue reserves could provide the current financial year of dividends.”
But, Ms Brodie-Smith says advisers should also consider an investment company’s level of gearing, whether the company is trading at a premium or discount and whether this has changed over time.
She adds: “Investors also find it reassuring that investment companies have been around for 151 years and there are 23 companies which are over 100 years old.
“They have survived two World Wars, the Great Depression and, more recently ,the tech bubble bursting and the financial crisis, and have continued to provide strong long-term returns for shareholders.”
Performance
According to Mr Wilson, advisers who have income-seeking clients are unlikely to receive complaints where the annual dividend income increases every single year, irrespective of capital performance.
Nevertheless, investment performance is, of course, another important measure of a good investment trust, he says.
He explains: “[But] focusing on two or three-year performance figures isn’t really appropriate or fair to the portfolio manager, whose objectives are set over five and 10-year horizons.
“Most investment trusts set themselves an appropriate benchmark to measure themselves against. So a consistent, long-term outperformance of this benchmark would be consistent with a trust delivering against a clear objective.”
Investment trusts have a board of directors who represent shareholders’ interests, and as with any fund, the quality of the fund manager is key and advisers need to look at the manager’s track record over the long-term and in different market conditions, notes Ms Gallagher.
She explains: “The board is there to challenge the fund managers and ensure corporate governance is upheld.
“They also have the authority to move the management of an underperforming investment trust.”
She adds: “Therefore a good investment trust is one which outperforms its peers and benchmark over the medium and long-term through good stockpicking skills and utilisation of the range of tools, listed above, which are unique to investment trusts.”
While Ms Brodie-Smith says investment companies benefit from independent boards of directors who provide an additional layer of oversight over the investment manager.
She observes: “Since 2013, over a third of investment companies have reduced their charges to benefit shareholders by cutting management fees, eliminating performance fees or introducing a tiered fee structure where charges fall as assets grow, enabling shareholders to benefit from economies of scale.
“This demonstrates the value of independent boards of directors.”
Separately, Ms Gallagher notes that because investment trusts are fixed pools of capital – shareholders' money – and do not have redemptions or inflows like open-ended funds, this provides the fund manager with long-term capital with which to invest and can, therefore, have a positive impact on medium and long-term performance.
