Why your cash would be better off in an investment trust

The average investment trust generated higher returns than cash in every ten-year period throughout the last decade, according to the Association of Investment Companies (AIC).

Rather than putting your savings into cash, it might be better to start investing, and investment trusts could be a particularly reliable place to start putting your money to work.

Brits have around £46 billion sitting in cash ISAs paying interest of 1.5% or less, according to data from Yorkshire Building Society. With inflation hitting 3.8% during July and August, the real value of these savings is being eroded alarmingly quickly.

The AIC analysed Morningstar data going back to 1996, and found that the average investment trust outperformed cash over every individual 10-year period during this timeframe.

It also found that the average investment trust outperformed savings accounts in 84% of three-year periods and 95% of five-year periods, as well as 100% of ten-year periods.

^{Source: The AIC / Morningstar}

“Since 1996, there hasn’t been a single ten-year period in which the average investment trust has done worse than cash,” said Nick Britton, research director at the AIC. “The best ten-year return for trusts in that period is 217% and the worst is 55%, which is still better than the best ten-year return for cash of 39%.”

Britton highlighted that past performance is not a guide to future performance and that over shorter time periods, it becomes less likely that investment trusts would outperform cash. Investment trusts beat cash in two out of three one-year periods over the past 30 years.

“Investment trusts should be considered by those who can invest for at least five years, and preferably ten or longer,” he added.

Investing in equities over cash

The problem with holding your savings in cash is that, while you’ll generate a predictable return, this return will be fixed. Increases in inflation can quickly start to eat into the long-term value of cash savings.

Investing in the stock market, on the other hand, increases your risk in the short term, but over the long term it gives you a better chance of generating above-inflation returns. That’s because, while the global stock market has its ups and downs, it tends to grow over time and to do so at a rate that beats inflation.

“Investing in the stock market is often seen as risky but over the long term, it has protected savings from inflation a lot more effectively than cash,” said Britton.

It is important to have a cash buffer to cover unexpected costs, and the predictability of cash means that this is the best place to hold this buffer; you don’t want to find yourself forced to dip into your investments while the market is enduring a downturn.

“Exactly how much emergency cash saving you need will depend on your personal circumstances,” said Claire Exley, head of financial advice and guidance at Nutmeg. “Think about your fixed bills, do you have dependents, how easy would it be for you to get another job if you needed to? As a starting point, we would usually suggest having between three and six months’ essential spending saved in an account you can easily access.”

Beyond this, though, it is worth considering putting your money to work in the stock market.

“Investing will usually allow your money to work harder than it would in cash savings,” said Exley. “Historical data tells us that over the long term, investments deliver better returns than cash savings.”

Why buy an investment trust?

An investment trust offers certain advantages over other forms of investment fund, though it should be noted that any investment should be made with consideration to your individual goals and circumstances.

They are closed-ended funds which means that they have a fixed number of shares which trade independently of changes in the value of the assets they hold (their net asset value, or ‘NAV’).

While that means investment trusts can trade at a discount to their NAV, it also makes them a superior vehicle for investing in long-term, illiquid areas such as infrastructure projects. Investment trust managers, unlike those of open-ended funds, will never be forced to sell their assets at a discount in order to meet investor redemptions.

Investment trusts can also borrow money to amplify their returns (known as gearing), and unlike other types of funds they can reserve up to 15% of their capital every year.

This allows them to smooth out dividend payments and maintain them during tougher years, making them potentially more reliable as a source of income. Anyone considering switching from cash to investing might find this reliability of income reassuring.

If you’re new to investment trusts and looking for inspiration to get started, read our explainer on the best investment trusts for beginners.