Another Reason to Like Investment Trusts

Editor's Views: Trusts' ability to keep paying dividends through the pandemic has been a major bonus

Holly Black 20 August, 2021 | 10:25AM
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There are lots of reasons to like investment trusts, and their resilience through the Covid crisis is just one of them. Of course, investment trusts are just as vulnerable to share price plunges as any other stock, but as long as you’re not panic-selling during a market sell-off, that should be of little real concern. Their ability to keep paying dividends through the depths of a crisis, however, is a major attraction and something few listed companies managed over the past year.  

Some features of investment trusts are undoubtedly a bit complicated, but they can also be incredibly beneficial once you get your head round them. They are, for example, allowed to retain 15% of their annual income in so-called revenue reserves. Why are they holding on to income when they could be paying that out to shareholders? Well, it’s a bit like a country mouse and city mouse analogy – a trust could pay out all of the income it receives to investors and they’d enjoy a bumper dividend that year. Or they can squirrel some of it away for the winter (or the pandemic, in this case), so rather than having a big payout one year and nothing the next, investors get a smoothed and reliable dividend, even in difficult times.

This is how we end up with so-called Dividend Hero trusts that have maintained and even increased their payouts for 10, 20 or 50 years. This is how investment trusts were able to pay out nearly £900 million in dividends in the first half of this year – only marginally lower than a year ago – while payouts from UK plc crashed by 44%.

Investment trusts are too often overlooked by investors, and I can understand why. You’re not going to find a jazzy crypto trust springing up to satisfy demand or one that homes in on meme stocks – some of these trusts are more than 100 years old and they invest with a view to maintaining that legacy. But I’d take low costs, reliable dividends and a century-long track record over the Next Big Thing any day of the week.

Hedge Your Bets on EV

Speaking of the Next Big Thing, my colleague Margaret Giles this week looked at the merits (or not) of start-ups in the Electric Vehicle industry. This is undoubtedly an exciting and growing space, but I find it concerning how willing investors are to jump blindly into stocks that are not yet profitable – some of which have no clear strategy for ever being so.

Spotting the next biggest trend is every investor's dream. If I had a time machine, I’d definitely go back and invest in Amazon shares. But you don’t always have to pick the newbie business. Investing in Ford or General Motors as a way of tapping into the EV market might not seem quite exciting as backing some young upstart making super-duper hydrogen batteries or charging points that can charge a Tesla is three seconds flat, but it’s far less risky.

That doesn’t mean avoid all new companies. Some of the EV start-ups will inevitably go on to be major success stories and 10 years down the line I’ll wish I had used my imaginary time machine to buy their shares instead. But what it does mean is do your research and hedge your bets. Buy the start-up if it truly looks like a success story waiting to happen, but maybe buy some of the less risky stuff too – just for a bit of balance.

Sustainable Space

The Space Race and sustainable investing aren’t two themes that obviously go hand in hand, so I was interested to speak to Aegon’s Malcolm McPartlin this week for his take on things.

So, the cost of putting satellites into space has come down by around 100 times over the past decade and that means better connectively across the globe, and that mean the potential for internet access to the 3 or 4 billion people in the world who don’t currently have it. These satellites, he points out, can help improve harvests, disaster management, and where the best sites for solar or wind farms are in the world.

We so often put ESG and sustainable investing into a very small box of renewable energy and corporate governance, but it’s so much more than that. One of the main arguments people make against investing in an ESG or sustainably-minded way is that it narrows their investment universe (pun not intended), but this sort of thinking really shows there are no limits.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk