When we relaunched our Investment Trust tab on our website, we put together a survey to better understand the users of our website, and particularly those who had taken the time to visit our dedicated Investment Trust Centre.
We wanted to get some insight into how they use investment trusts in portfolios, if indeed they are used, and what it is that draws our users to them, or pushes them away.
As fellow-CEF analyst Szymon Idzikowski and I looked through the results of the 533 participants, we soon realised there was a very clear message in there, which is this: discounts and gearing are not putting investors off investment trusts.
Why is this message so important? It’s important because it doesn’t match what we’re hearing elsewhere. The general consensus among the industry is that there is reluctance to recommend investment trusts because of their complexities and a fear that investors are, or will be, put off by these features, with gearing and discounts being two such cases in point. But the results of our survey show very clearly that this isn’t the case among private investors managing their own portfolios.
Over half of the respondents came to our Investment Trust Centre in search of new investment ideas. Whether they’re advisers or private investors (and the vast majority were private investors), this alone proves there is active interest in investment trusts. Further, over one-fifth of participants were looking to learn more about them and were searching specifically for education. An overwhelming 89% of users said they were interested in investing in closed-end funds in the future. That suggests that private investors are well-informed of the merits of investment trusts, even if some want help understanding the finer detail.
Happy with the Nuances of Investment Trusts
We then asked our users about specific features of investment trusts and how important they were in their decision-making process. First we asked about discounts. Approximately half of our participants cited discount as an important part of their decision, but for the other half, it had little or no importance. We agree that the discount can play a key role in some investment decisions, but that doesn’t mean it has to be a deterrent. The need for a formal discount control mechanism was low, with less than 25% of respondents citing it as important. We tend to agree here; we think clear guidance on the board’s discount policy and when/how it will act—with demonstrable evidence—has as much value as a formal target discount level, if not more.
Next we asked about the importance of gearing when making their investment decisions. Two-thirds of participants stated that gearing was of little or no importance. It seems investors are less fearful of gearing than is oft-perceived to be the case, therefore. The Association of Investment Companies (AIC) has campaigned hard with their membership to give clear guidance on funds’ gearing policies and it may be that this has helped to allay investors’ fears. Or it may be simply that closed-end fund investors recognise gearing as a benefit of the legal structure which has added value over the long term when used well. Either way, it isn’t as great a concern as some may think.
Tapping Into Investment Trusts' Income and Alternatives Potential
More than half of respondents did cite regular dividend flow as important to them and only 15% said this had little or no importance. That didn’t surprise us as we’ve talked a number of times about the benefits of the revenue reserve account in the closed-end fund structure so this feature is an attractive one to income-seeking investors. Indeed, two-thirds of participants (63%) were saving for their pension.
Nearly half of the participants (44%) wanted access to alternative asset classes through their investment trust holdings, such as property and private equity. We’re encouraged by this as we think these are areas in which the closed-end fund structure works well for investors. In a post-RDR world, we think advisers are more likely to recommend these types of funds than some of the generalist equity funds as they offer something a little different, that isn’t easily accessible elsewhere. Our users also cited sector-specific funds as the investment trust they’re most likely to hold, or indeed are holding already.
Old Time Favourites
Nearly half of respondents first heard about investment trusts through a newspaper or magazine article. A mere 2.6% first heard about them through an asset manager’s advertising. That suggests to us that asset managers need to do a much better job of promoting their investment trust range and give them the air-time they deserve. There were a number of responses to this question which alluded to the length of time respondents have known about investment trusts and thus couldn’t remember how they first heard about them. We see that as a common feature of a typical investment trust investor - perhaps it’s an investment that has been passed down through the family or bought for them as a child, or maybe it’s one they bought many years ago and have simply held on to as it’s done well. We know from our conversations with investment trust managers that it’s common for investors to keep their shares for decades.
A relatively small number of participants were directly impacted by the split-cap scandal in the early 2000s but we were pleased to see that, of this number, most hadn’t been put off investment trusts as they understood these funds have a different structure. Nonetheless, it’s clear to us that more work needs to be done on educating investors about all things investment-trust-related, so watch this space.
Further Education To Come
Finally, we had numerous requests around comparability of investment trusts, with both open-end funds and ETFs. This wasn’t just restricted to legal differences, but also those of performance and costs. You can expect to see more from us on this soon.
In conclusion, we think it’s proof that not only is interest alive and kicking in investment trusts, but it’s growing, as evidenced by the survey participants looking for education on investment trusts, as well as the indicative levels of their future use.
Thanks to all of you who took the time to complete the survey. We really appreciate your feedback; it helps us to improve our closed-end fund service to you.
Further Reading
3 Key Takeaways from Our Survey
Looking for Income? Investment Trusts Trump OEICs
Investment Trust Picks for Income-Seekers
Understanding Morningstar's Investment Trust Ratings
Rank Investment Trusts by Their Morningstar Rating
Screen for Investment Trusts that Meet Your Needs
