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.
In spite of difficult market conditions, investment trusts have continued their popularity in 2022, raising £4bn in the first half of the year.1 Their enduring popularity in the face of volatile conditions is a reflection of the diverse role investment trusts can play in an ISA portfolio – from diversification, to access to alternative asset classes, to inflation protection.
During the first half of this year, demand was particularly strong in areas such as infrastructure and real estate. This reflects their inflation-protecting qualities, but also 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 assets such as infrastructure, but also other asset classes that are difficult to buy and sell quickly, including smaller companies, emerging markets or royalties. These areas can all bring new sources of potential capital return and income to a portfolio.
Diversification has become more difficult, with correlations increasing between conventional equities and bonds.2 Investors have had to cast their net more widely to diversify their portfolios. Investment trusts allow them to do this by accessing assets that aren’t available through open-ended funds.
Even in markets where liquidity isn’t a consideration – such as Europe or the UK – the closed-ended structure can help the fund manager manage effectively through an environment where investors are nervous and share prices move quickly. They do not have to sell their holdings to meet redemptions as worried investors exit and may even be in a position to take advantage of market dislocation. This gives them real flexibility in volatile market conditions.
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.
Diversification: Diversification and asset allocation may not fully protect you from market risk.
Investment trusts are also a useful source of flexible income. This is not only because they can include alternative, income generative assets not available to open-ended managers, but also because many trusts have income reserves. This means they have built up reserves of income in the good times, with a view to paying it out in more difficult conditions – when companies are cutting their dividends. Many companies will have six months or even a year’s worth of dividend reserves to sustain their payouts to investors in tough moments.
Many investment trusts have a long-term commitment to growing their payouts to investors. The Association of Investment Companies (AIC) dividend heroes are the investment companies that have consistently increased their dividends for 20 or more years in a row.3 Some of the strongest companies have delivered more than 50 years of consistently rising dividends. As such, investment trusts have been a consistent source of reliable income, even during difficult periods such as the pandemic.4 This sits nicely within an ISA wrapper, where all income is generated tax-free for investments.
Past performance is not a reliable indicator of current or future results
Investment trusts have independent boards who hold management companies, such as BlackRock, to account both on investment performance and on fees. The AIC points out that 14 investment companies made fee amendments in the first half of 2022 alone.1 Boards can help ensure that investment trusts are competitive and help monitor the performance of the trust. At a time when market returns are weaker, costs becoming more important and investment trusts may be an alternative option to other low-cost funds in a portfolio.
Investment trusts can help improve an ISA portfolio’s diversification, through investment in less liquid asset class. They can give fund managers greater flexibility to manage through volatile markets. They can also be a source of stable income. There is a wealth of choice in the investment trust sector, potentially helping to build balanced portfolios at a difficult juncture for markets.
105/07/2022 - https://www.theaic.co.uk/aic/news/press-releases/investment-company-h1-2022-review
217/10/2022 - https://www.morningstar.com/articles/1117760/whats-next-for-the-relationship-between-stocks-and-bonds
312/12/2022 - https://www.theaic.co.uk/income-finder/dividend-heroes
402/09/2021 - https://www.sharesmagazine.co.uk/article/trust-dividends-more-resilient-in-pandemic-than-headlines-suggest
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.
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.
The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
Any research in this material 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 material 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.
© 2023 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.