Investment trusts are a core feature of the UK financial sector, providing both private investors and corporations with the chance to increase their investment portfolio.
Often referred to as investment companies or closed-ended funds, they are similar in design to other types of ‘pooled’ investment options and structures that all allow you to combine your funds with that of other investors to increase their exposure to an extensive range of assets. Investment trusts are publicly listed companies in design that invest in an extensive range of financial assets, shares or other publicly listed companies on behalf of their stakeholders.
Although investment trusts are a common feature of the UK investment sector, not much is known about how they have developed into such an influential option within the UK.
History of Investment Trusts
In comparison to other financial institutions within the UK financial sector, the history of investment trusts is relatively short.
The first formal investment trust, Foreign & Colonial Government Trust, was established in the mid-19th century in London, to grant investors of moderate financial backings access to the stock markets. The stock markets or the financial world in the mid-19th century wasdominated by much larger organisations and investors who had access to significant financial markets. The introduction of investment trusts in the Victorian period revolutionised the access of ‘ordinary’ people into the financial world and provided the British Empire at the time new means to fund schemes across the world.
After the introduction of the first investment trust, the idea and establishment of investment trust took off in the latter part of the 19th century. By the outbreak of war in Europe in 1914, 90 investment trusts had been established – 26 of which are existent today.
Today investment trusts are widely recognised as a UK financial institution and are continuing to grow in popularity at an ever-increasing rate. At the end of 2019, the total assets under management were in the region of £200 billion, an increase of £120 billion in the past 10 years. Although this is a considerable amount, this is dwarfed by the £9.1 trillion worth of assets managed by the UK investment industry.
What has the development and introduction of investments trusts provided ‘ordinary’ investors?
What are the advantages of investing with an investment trust?
Investing with an investment trust has become an attractive option for private investors and businesses looking to expand their investment portfolio and potential for returns.
Whilst all forms of investing, including investment trusts have their own risk associated. Purchasing funds in an investment trust comes with relative protection due to the common structure of a trust. Investment trusts are structured so that they have an independent board that is responsible for safeguarding investors funds and intentions. This provides investors and their investment from internal issues such as poor performing portfolio managers and restructuring, ensuring the returns from their investment is not compromised.
This is one of the main advantages and attractive aspects to investing with an investment trust. While you have to pay trading commissions when you complete a transaction (buy or sell), investors avoid fund platform fees that open-ended or traditional investment provider’s charge. Avoiding such regular payments can make a substantial difference to investors wealth over the long term. For this reason, investment trusts are seen to be an extremely cost-effective option whilst providing the potential for long term returns from a single investment.
Long term investments
Whilst at first the following advantage can be interpreted as a limitation, there is a significant financial benefit for the investor and investment trust.
Investment trusts in the design are closed-ended. This means the portfolio manager looking after your investment has a fixed amount of capital to manage. While this means investors can’t suddenly demand their money back based on short-term performance and portfolio managers do not need to worry about holding cash aside for repayments.
A structure such as this minimises the drag for approval or further funds and can benefit/ boost performance in the long term, furthermore, this can provide be the basis for substantial growth in investment opportunities later down the line.