As with other funds, investment trusts will levy their own management charges which you will pay on top of stockbroker management fees and trading fees.
Managing and monitoring your investment
As with any investment in your portfolio, you should keep abreast of the performance of your trust holdings. In addition to checking the individual performance, it’s also worth checking its relative performance by comparing it with its peers or the sector average. Be aware of manager changes too, as big names leaving can affect the share price and may signal a change of strategy.
But investors should still bear in mind that investment trusts should be long-term holdings and, unless their fundamental strategy has changed, should only switch if a trust is consistently under-performing.
Risks and considerations
- Volatility – “Investment trusts are more volatile and complex than unit trusts because of their pricing structure,” Mr Khalaf warned. “Investors need to be aware that just because a trust is trading at a discount doesn’t necessarily mean it’s a bargain – if it consistently trades at a discount it may just be par for the course.”
- Share prices – the price of shares will be affected by sentiment and can rise and fall, irrespective of stock market performance
- Gearing – although investing borrowed money can boost returns in rising markets, it can also amplify losses when they fall
- Liquidity – risks are increased if trusts are invested in illiquid assets that can take time to sell
How much do investment trusts cost?
The cost of investment trusts can vary substantially, just as they do with open-ended funds. Investors can compare costs by looking at individual trusts’ ongoing charge figure, or OCF. The popular Scottish Mortgage Investment Trust, for example, has an OCF of 0.35pc, while the City of London Investment Trust – one of the AIC’s dividend heroes – has an OCF of 0.37pc. Some investment trusts may also have an additional performance fee, if it reaches a specified benchmark.
Ms Khalaf added: “There are some very cheap investment trusts out there, but when it comes to charges, trusts and funds are best compared individually, because broad sweep averages don’t tell the whole story. Most trusts and open-ended funds are comparably priced and investors need to consider charges alongside other factors such as the investment strategy and quality of the investment manager.”
Do you pay tax on investment trusts?
You could become liable to pay tax on your dividends and capital gains when you sell your holding. However, this can be avoided by holding investment trusts in an Isa or pension.
Are investment trusts considered a good investment?
The unique features of investment trusts make them popular with certain investors – including those who want access to illiquid assets and income seekers who can benefit from smoothed dividends. However, as with any investment, it’s important that you have a long-term view and choose a trust that matches your risk profile.
