|This page contains details specific to non-US investors. It does not apply to United States (US) investors, or to US citizens and US permanent residents (green card holders) living outside the US.|
An Investment trust (IT) is a form of investment fund found mostly in the United Kingdom and Japan. Investment trusts are closed-end funds.
Investment trusts are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors.
The purpose of this page is to act as an introduction for non-US investors who may wish to consider the use of investment trusts as part of their investment plan. Investment trusts have been part of the UK investment markets for many decades and are a trusted form of vehicle for many investors. In addition investment trusts can be helpful in certain circumstances from a taxation point of view.
- 1 Investment trusts
- 2 Costs
- 3 Tax matters
- 4 Role in a portfolio
- 5 Access to investment trusts
- 6 References
- 7 External links
Investment trusts are in use in Japan, New Zealand and Australia, however no more than cursory references to this area can be made in this section. Subject to inputs from Bogleheads® investors and contributors who are familiar with non-UK investment trusts this will remain the status. Information on closed end funds domiciled in the US are not included in this paper.
This article will not delve into any great detail of investment trusts, in regards to their legal structures; governance; the applicable legislation; performance history and the underlying investment philosophy. The references, including links, listed below provide a more than adequate background to the subject.
The use of investment trusts for a simple Bogleheads® approach is counterintuitive due to the management style and the ongoing costs, however this should not exclude its consideration for reasons of diversification, simplicity and potential tax optimisation. Foreign and Colonial Government Trust’s first prospectus captured the intention in the clear prose:
The object of the Trust is to give the investor of moderate means the same advantages as the large Capitalists, in diminishing the risk of investing in Foreign and Colonial Government Stocks, by spreading the investment over a number of different Stocks, and reserving a portion of the interest as a Sinking Fund to pay off the original capital
— Foreign and Colonial Government Trust’s first prospectus, from CFA Society, United Kingdom
Any investment into this type of fund should be carefully considered, appropriate research should be carried out and advice should be sought from a qualified financial adviser prior to making any investments.
Key points on investment trusts
When you invest in an investment trust you are buying shares in the investment trust, the value of which fluctuates based on:
- the underlying value of the assets they own, and
- the supply and demand for their shares
A few key observations regarding investment trusts (ITs):
- ITs are closed end funds and as such have a limited number of shares, additional shares are not normally issued and shares are not subject to buyback
- The shares are traded on the stock market throughout its opening hours.
- Share trades for investment trusts are subject to normal commissions.
- The share price at any time might not equal the NAV; premiums and discounts to the NAV are based upon market supply and demand.
- ITs can use leverage and this will increase the risk attached to the fund.
- ITs are actively managed funds.
- The management fees for ITs are generally higher than a passively managed index fund.
Foreign and Colonial
Foreign and Colonial is probably the most famous name in investment trusts and it is highlighted here for that reason and not due to any perceived outperformance. The original company was founded in 1868 as the Foreign and Colonial Government Trust and was the first collective investment trust in the world. It originally invested in government bonds only.
The company has approximately £4.3bn under management, with stakes in about 500 companies around the world and is listed on the LSE and the New Zealand stock exchange.
The Foreign and Colonial name was re-branded recently to F&C (FCIT) and has now been re-branded again to a range of BMO fund names with new tickers associated.
Following the take over by the Canadian asset manager BMO the F&C funds have become part of their stable of funds and F&C is now called: BMO Capital and Income Investment Trust PLC with the new ticker: BCI.
|Previous investment trust name (ticker)||New name (ticker)|
|F&C Capital and Income Investment Trust PLC (FCI)||BMO Capital and Income Investment Trust PLC (BCI)|
|F&C Global Smaller Companies PLC (FCSC)||BMO Global Smaller Companies PLC (BGSC)|
|F&C Managed Portfolio Trust PLC - Income (FMPI)||BMO Managed Portfolio Trust PLC – Income Share Class (BMPI)|
|F&C Managed Portfolio Trust PLC - Growth (FMPG)||BMO Managed Portfolio Trust PLC – Growth Share Class (BMPG)|
|F&C Private Equity Trust PLC (FPEO)||BMO Private Equity Trust PLC (BPET)|
|F&C UK High Income Trust PLC - A Share (FHI)||BMO UK High Income Trust PLC – Ordinary Share Class (BHI)|
|F&C UK High Income Trust PLC - B share (FHIB)||BMO UK High Income Trust PLC - B Share Class (BHIB)|
|F&C UK High Income Trust PLC - Units (FHIU)||BMO UK High Income Trust PLC – Units (BHIU)|
|Foreign & Colonial Investment Trust (FRCL)||F&C Investment Trust (FCIT)|
Investment trust providers - UK
The Association of Investment Companies exists to look after the interests of investment trusts and provides a search facility for registered investment trusts.
The top ten are listed below in order of total asset value (July 2019):
|Investment trust||Total assets|
|Scottish Mortgage - global IT||£8.73bn|
|3i - private equity||£8.72bn|
|Pershing Square holdings - hedge funds||$5.24bn|
|F&C investment Trust - global IT||£4.32bn|
|RT Capital Partners - IT||£3.37bn|
|Alliance Trust - global IT||£3.09bn|
|HICL Infrastructure - infra IT||£2.78bn|
|Tritax Big Box REIT - property IT||£2.76bn|
|Greencoat UK Wind - renewables IT||£2.74bn|
|Templeton Emerging Mkts - em IT||£2.35bn|
The top ten largest global investment trust funds excluding REITs and hedge funds etc are as follows (July 2019):
|Global investment trust||Total assets|
|F&C investment Trust||£4.32bn|
|Scottish Investment Trust||£800m|
|JP Morgan elected managed growth||£273m|
Note that the above figures are the underlying total asset values and differ from the NAV. The difference between the asset value and the NAV can be substantial.
Selection of investment trusts
Investment trusts are actively managed by a fund manager, who looks to various sectors and asset types to achieve the funds goals. This allows the investor to invest in assets that may not be normally accessible. The range of funds also allows the investor to choose particular geographies, sectors, investment styles or industries.
The manager can choose to invest in assets including:
- Company shares
- Other funds
There are over 400 investment companies, many of which have existed for more than 50 years. They include:
- Investment trusts
- Offshore investment companies
- Venture Capital Trusts (VCTs)
- Split capital investment companies
The subject matter under discussion here is investments trusts.
The Association of Investment Companies website provides information on the registered companies in regards to:
- Dividend payments
- Share price and total returns
- NAV total returns
- Trading volumes
The largest sectors by assets under management UK based (December 2017) were:
- Global (£27.1 billion)
- Private Equity (£14.7 billion)
- UK Equity Income (£12.0 billion)
- Infrastructure (£10.0 billion)
- Specialist Debt (£7.8 billion)
Management and performance fees
You will pay an annual management fee and other ongoing administration costs. These costs are normally offset by the income a trust receives from its investments, and the difference is distributed to the trust’s shareholders as its dividends. The full amount of these charges, known as the Ongoing Charge, tends to be lower than for unit trusts and OEICs, especially for the largest investment trusts (those with assets of £500m or more).
One reason for the lower costs is that investment trusts are not allowed to advertise themselves, which saves them money, although they are allowed to promote savings plans that let you buy their shares on a regular basis. On top of this, because they are closed-end funds, they don’t have to deal with money coming into and leaving the fund, something that open-ended funds have to contend with.
Investment trusts may charge for other ‘incidental’ costs such as performance fees which are paid to the manager if they meet certain targets. Although this is not normally included within the ongoing charges figure, this information can normally be found in the Key Information Document.
Typical fee ranges
According to the AIC website:
- Global investment trust charges range from 0.37% to 0.99%. These figures include performance fees where these are applicable.
- Global emerging market investment trusts charges range from 0.70% to 2.70%. These figures include performance fees where these are applicable.
- Global smaller companies investment trusts charges range from 0.81% to 1.47%. These figures include performance fees where these are applicable.
- European smaller companies investment trusts charges range from 0.70% to 1.18%. These figures include performance fees where these are applicable.
- JP Morgan US Smaller Companies Investment Trust fees are 1.33% including performance fees.
Investment trusts usually have smaller operating costs than open ended funds also known as OEICs (Open Ended Investment Companies) so their charges are generally lower.
Transaction and associated costs
Because investment trusts are public companies traded on the LSE, you will buy investment trust shares just as you would shares in a normal company, and therefore the charges are similar. You will pay the stockbroker’s commission on buying and selling. Should you use a cheap broker or platform, it should be relatively small. In addition to the transaction commissions, you will lose a small amount because of the difference between the bid and offer prices of the shares of the trust. However, again, this tends to be a relatively small amount, especially for the largest trusts. You also have to pay stamp duty of 0.5% on purchases.
As noted below access to investment trusts may be restricted on some platforms.
The UK's IT regime benefits from an attractive tax regime. As a UK tax resident company, an IT is within the charge to UK corporation tax but, where approved as an IT for an accounting period, the IT is exempt from UK tax on its chargeable gains for that period. An approved IT is broadly subject to corporation tax on its income in the same way as other UK tax resident companies. However, because of the nature of its activities, the company should fall to be treated as a company with investment business and therefore gains are tax free.
In addition, an IT is likely to be exempt from corporation tax on dividends or distributions received from its equity investments.
Investors are generally subject to tax in the same way as they would be if they held shares in an ordinary UK tax resident company.
As of April 2018, all individuals are eligible for a £2,000 tax-free Dividend Allowance. Dividends received by pension funds or received on shares within an ISA will remain tax free and won’t impact your dividend allowance. You can find more information and examples in GOV.UK’s Dividend Allowance factsheet.
Many unit trusts can be held in an ISA. In this case, your income and capital gains will be tax-free. Investigate investing via ISAs and other tax-efficient ways to save or invest.
Any profit you make from selling shares outside an ISA may be subject to Capital Gains Tax.
The taxation of ETFs and mutual funds in Ireland give rise to a particular peculiarity for Irish investors in the use of ITs which can lead to real financial benefit.
UCITS fund taxation
Irish taxation of ETFs and UCITS funds is applied at a rate of 41% of all gains applied every 8 years either on a deemed sale basis or on a actual sale. This tax regime is particularly punitive. In addition any losses in other investment assets cannot be offset against ETF or UCIT funds.
However ordinary shares are taxed at the marginal rate of the tax payer and losses can be offset. Capital gains are subject to normal taxation rate of 33% on any gains on sale.
Taxation of investment trusts
Under Irish tax regulations investment trusts qualify as shares, avoiding the punitive tax rate on funds and ITs are subject to taxation at the tax payers marginal rate with the ability to offset losses. The use of closed end investment trusts is therefore attractive and in particular for investors paying income tax at a higher rate. The benefits need to be carefully calculated on a cash flow basis so as to assess the exact benefits taking into consideration marginal tax rates and the duration of the hold period.
As a consequence the use of ITs could be considered by the Irish investor as the risk side of their investment portfolio. As ITs no longer provide a focus on fixed income, therefore the investor would need to look to the usual ETFs and mutual funds for this side of their portfolio. In addition the lower likely income levels from bonds mitigates the higher tax rates that are applicable.
Where an investor who is not tax domiciled in Ireland but is resident there, a further anomaly arises: the capital invested by that individual in an IT can grow without taxation. Any income remitted to Ireland from an IT would then be subject to marginal rate income tax only.
Role in a portfolio
- The price of shares in an investment trust can go up or down so you could get back less than you invested.
- The level of risk and return will depend on the investment trust you choose. Find out what type of assets the trust will invest in, as some are riskier than others.
- Look at the difference between the investment trust’s share price and the value of its assets as this gap may affect your return. If a discount widens, this can depress returns.
- Find out if the investment trust borrows money to buy shares. If so, what level of gearing does the investment trust use as returns might be better but your loses greater.
Benefits of investment trusts
Investment trusts have some of the characteristics of a Bogleheads® portfolio contained within one fund structure. The larger global ITs have diversified across the spectrum of stocks and credit assets and other assets. Although generally the cost ratios of ITs are greater than the best iShare or Vanguard ETFs the larger ITs are becoming more competitive.
Global ITs aimed at emerging markets, small cap companies and particular regions are also available which could sit beside a global single IT as the main investment vehicle.
- As a pooled investment fund investors can avail of added scale and diversity in a single vehicle.
- Gearing can enhance returns allied however with increased risk.
- As an investor in an investment trust you can gain access to assets that are generally not available such as hedge funds, infra structure and REITs.
- Investment trusts use active management and this may or may not lead to improved returns.
- Purchasing investment trust shares at a discount could provide added value over the longer term.
Access to investment trusts
In the UK you can buy shares from a stockbroker or directly through an Investment Trust Savings and Investment Scheme (ITSS) or from an online share dealing facility, through an IFA and financial planners.
Shares can also be purchased directly from some investment trust managers.
Investing via a platform means that you can select from a wide range of trusts, switching between them as performance and investment conditions change. Moreover, those who regularly use the same platform can see all their holdings in one place, allowing them to more easily track performance relative to others, dividend payments, annual meeting dates and so on at a glance. Some platforms do not offer these funds. This means that individuals may find that they are difficult to access through an existing platform and need to use an alternative.
Compare fund platforms provides comparative information on the relative costs of accessing funds in the UK.
- "Why the first investment company matters". CFA Society. https://www.cfauk.org/pi-listing/why-the-first-investment-company-matters. Retrieved July 13, 2019.
- Investment trust, Wikipedia
- Guide to investment companies
- What is an investment trust
- Trustnet. com
- What is an Investment Trust, Morningstar UK