BlackRock
Updated 05 Jul 2024
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Why use an investment trust?

In spite of difficult market conditions, investment trusts continued their popularity in 2023, with total assets rising modestly to £268bn. Indeed, investment trust industry assets under management have doubled since 2015, which suggests their enduring popularity in the face of volatile markets, is a reflection of the diverse role they can play for investors looking for income, growth or a balance of both.

In recent years, demand has been particularly strong for investment trusts serving alternative areas such as private equity, infrastructure and real estate1. This highlights an important advantage of investment trusts. They are 'closed-ended’ – in other words, they don’t have to sell assets when investors redeem. This means investment trusts provide permanent capital to the fund manager, allowing them to take a long-term view on the assets they hold.

This makes them an ideal vehicle to hold illiquid asset classes, but also other assets that are less easy to buy and sell, such as smaller companies, commodities and emerging market equities, which could bring new sources of potential capital return and income to a portfolio.

BlackRock manages nine investment trusts focused on specific market niches, and, for more than 30 years, has been helping investors access their distinct advantages, as described below.

Diversification

Diversification has become a more difficult challenge for investors to overcome, with correlations increasing between conventional equities and bonds. Investors have become accustomed to bond and equity prices moving broadly in the same direction, which has meant casting their net more widely to diversify portfolios. Investment trusts have helped them do this by providing access to assets that aren’t readily available through open-ended funds.

In 1999, more than 80% of investment trust industry assets were concentrated in public equity markets. Today, that figure stands at less than 50%, because the investment trust industry has been helping investors overcome the diversification challenge by providing access to opportunities where risks and returns are less correlated to traditional asset classes, including infrastructure, property and other specialist areas.2

Income opportunities

Investment trusts are also a useful source of flexible income. This is not only because they can include alternative, income generative assets not readily available to open-ended funds, but also because trusts can build income reserves. Not all income that is generated by an investment trust income portfolio needs to be paid out each year. This means they can smooth the flow of income by building up a buffer of “reserved income” in the good times, with a view to paying it out in more difficult conditions, when many companies may be cutting their dividends. Some investment trusts have built reserves worth more than a whole year’s dividend to sustain payouts to investors in tougher times.3 This ability is highly-prized by income investors who prefer to see a more reliable flow of dividends regardless of the broader investment environment.

Indeed, many investment trusts have an explicit long-term commitment to dividend growth. The Association of Investment Companies (AIC), the industry body that represents the investment trust sector, publishes an annual list of its “dividend heroes”. These are the investment companies that have delivered dividend growth in 20 or more consecutive years. For example, earlier this year, the BlackRock Smaller Companies Investment Trust joined the list, having increased its payout to shareholders for the 20th consecutive year in 2023.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy

Growth potential

The allure of investment trusts goes well beyond just income investors, however. Many investors that are looking for higher growth or a balance of income and growth may be also attracted to the investment trust structure, because of its ability to cater for a range of investment objectives across a broad suite of asset classes.

Cost competitive

One of the key benefits of the investment trust structure is the presence of an independent board of directors. The board acts as a robust and effective governance and risk management system, overseeing the trust’s investment strategy and ensuring alignment with its stated objectives. In turn, this helps to promote transparency, accountability and underpins investor confidence.

This independence can come into its own in times of market turbulence. Boards can help to monitor the performance of the company they oversee and should represent their shareholders to ensure that their trust continues to be competitive.


Conclusion

Investment trusts could offer investors of all types some uniquely attractive benefits. They can help to improve a portfolio’s diversification by providing access to a broader range of investment opportunities. Meanwhile, they could also offer a source of stable income and significant growth potential.

Overall, there is a wealth of choice in the investment trust sector, which can help investors to build balanced portfolios that can fulfil a range of objectives over the long term, even in challenging market conditions.

1 Association of Investment Companies (AIC) – the changing face of investment trusts – 11/03/24
2
AIC – the changing face of investment trusts – 11/03/24
3 Interactive Investor - Eight income investment trust heavyweights - 10/05/23. Analysed by BlackRock 30/04/24

Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Description of fund risks

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Liquidity Risk: The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

Smaller Company Investments: Shares in smaller companies typically trade in less volume and experience greater price variations than larger companies.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

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