Investment trusts are a great way to boost your returns, thanks to low charges and transparency, but what is the best way to invest?
Making the most of investing is not just about picking investments wisely, it’s also important to make sure you hold them in the best place.
Costs are consistently being trimmed and investors can now choose to hold all everything within one handy online wrapper.
What are investment trusts?
Investment trusts are listed companies with shares that trade on the stock market.
Trusts invest in the shares of other companies and are known as closed end, meaning the number of shares or units the trust’s portfolio is divided into is limited. Investors can buy or sell these units to join or leave, but new money outside this pool cannot be raised without formally issuing new shares.
Investment trusts can be riskier than unit trusts because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value.
Why use investment trusts?
Fees for investment trusts tend to be lower than funds, which means your returns are not as affected by charges.
An investment trust is closed ended, meaning there is a fixed amount of shares, unlike in a fund where you risk having your returns diluted if more people invest or if a whole load of people try to sell out their holding.
There is an old Square Mile adage that ‘unit trusts are sold, but investment trusts are bought’.
What the City veterans are getting at here is that the investing public is bombarded by advertisements and mail shots about the vast universe of open-ended funds, i.e. unit trusts and OEICs, which tend to have large marketing budgets.
But people typically have to do a bit of work themselves to discover the advantages of the much more introvert investment trust world.
The fact is, investment trusts don’t advertise anything like so much because, as so-called closed-end funds, they have a fixed number of shares in issue.
Therefore, the argument goes, if you are inviting one person to buy then you are also asking someone else to sell. Not much point – and certainly no money – in that.
Those who take the time to research the fascinating but understated investment trust sector are unlikely to regret it.
In fact, delve a little deeper and ask a few pointed questions and you will find that many fund management professionals put their own money into investment trusts as the vehicle of choice.
The problem for those who prefer investment trusts to funds (Oeics and unit trusts) is that while their management charges are lower and there are no initial fees, they are traded like shares and so attract dealing charges.
Buying investment trusts
You can either invest in a trust via a stockbroker, as you would do shares, or through an online investing platform.
Some investment houses will also allow you to invest in their trusts direct, either as part of an Isa or a straightforward investment.
If you are happy investing without financial advice, the best option tends to be through an online platform as these tend to have cut dealing fees below tradition brokers’ levels. It may cost more than buying direct but allows you to hold all your investments in one place.
The important questions to ask yourself before you decide how to invest is whether you want to hold your trust in an Isa and hold all your investments in one place.
By choosing an online Isa platform product, you essentially invest in an Isa wrapper which you can put round and number of trusts in the same year, as long as you don’t exceed the annual Isa limit.
The advantage of investing through a platform is also that you can see and monitor your holdings in one place, you can do this whether you opt for an Isa product or just a straightforward investment account. The disadvantage is that you may pay a small fee for holding trusts. Dealing charges can also range from £5 to £12.50.
If you buy direct with an Isa wrapper, then that is your investing Isa allowance for that year and you may only be able to invest tax-free either in that trust, or the investment houses other trusts in that financial year.
As an example of investing direct Aberdeen Asset Management allows investors to buy into its selection of trusts either with an Isa wrapper or as a straight investment (it also offers Isa transfers in).
For straightforward investing, buying carries no charges but selling costs £10, there is no annual administration fee and the minimum lump sum is £250 and regular investing sum is £100. For an Isa wrapper, there is no buying charge, a £15 selling fee, and a £24 plus VAT annual administration fee. Minimum lump sum investment is £1,000 and regular investment is £100.
Using a platform
You could access investment trusts from different companies and combine them with other products such as shares and funds by using a platform.
Hargreaves Lansdown is one example of a platform that will let you do this in a number of ways.
Investment trust dealing costs £11.95 per trade (for one to nine trades per month, more trades brings the price down), and this fee applies for both one-off investments and regular investing. Regular investing is now £1.50 per month
Investors with an Isa holding investment trusts have an annual charge of 0.45 per cent of their value, capped at £45 per year.
Non-Isa investors are not charged. The Hargreaves Lansdown platform is really best suited to fund investing rather than investment trusts, but is useful if you plan to hold the two together.
Why invest through an Isa?
Investing with an Isa is one of the few opportunities we have for making money with very little tax but it doesn’t offer complete tax-free status.
Every year the Government gives us a tax-free Isa allowance. For 2015/16 the allowance is £15,240.
You are able to move money from an investment Isa into cash Isa under the rules or put your whole allowance in a cash Isa. This applies to any money you have invested in previous years.
Any gains within an Isa are free from capital gains tax. Everyone has a CGT allowance, currently £11,000 per year, and many may feel they are unlikely to ever make more than this in profit each year from selling their assets.
However, those who invest consistently over time may one day be surprised at how much those investments are worth and holding them in a tax-free wrapper makes sense.
This is because if they opt to sell all or a large amount of their investments at one time and they are not held in an Isa, then they may be over the capital gains tax limit and face a tax bill. Whereas, hold them in an Isa and you have no such problem and will not even need to fill in a tax form if you sell.
Income from investments is also treated in a more tax-friendly way in an Isa. Corporate bonds and gilts income is tax-free.
Dividends and shares income are still taxed at 10% before they are received, so basic rate taxpayers will not gain any extra benefit, but higher rate taxpayers do not have to pay any extra tax that would normally be incurred.
If you are a basic rate taxpayer you may hope to be a higher rate taxpayer one day, so putting your investments in a tax-free wrapper is a sound tactic. Investing through an Isa also removes the headache of filling in a tax return for both income and capital gains.