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UK investment trust assets have increased from £78 billion in 1999, to £267 billion today1. Many factors have driven this, but the role of the Individual Savings Account (ISA), soon to celebrate its 25th anniversary, should not be underestimated.
The democratisation of UK investment
Originally introduced in 1986 as the Personal Equity Plan (PEP), its purpose was to encourage the “democratisation” of investment, by offering a tax-efficient avenue into the stock market to a broader range of savers. The amount investors can shelter from the tax authorities has increased over the years and currently stands at £20,000 per person.
There is little doubt that the ISA has been a tremendous success in fulfilling its original objectives. In total, more than 22 million people currently use the ISA wrapper to help build their long-term wealth2.
The unique attractions of investment trusts
The ISA’s role in democratising investment in the UK has helped catalyse the significant growth we have seen from the investment trust industry. BlackRock manages nine investment trusts focused on specific market niches and, for more than 30 years, has been helping investors access their distinct advantages which are described below. For these reasons, we believe investment trusts should be viewed as an ideal vehicle for ISA investors.
Independent governance
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.
Liquidity and ease of access
Investment trusts are listed on the stock market, which provides a simple and liquid route for buying and selling their shares, via online trading platforms or through an independent financial adviser. A listing also provides visibility and credibility, which help to ensure the continued attractiveness and relevance of investment trusts to the modern ISA investor.
Gearing can enhance returns
Investment trusts can also borrow to increase the amount of assets that are available for investment. This amplifies the potential return available by providing additional capital to invest in the underlying assets. This allows investors to benefit from increased exposure to rising markets over the long term, but exposes them more to potential price declines in the short term. The level of borrowing, or “gearing” as it is known, is set by the board, which ensures that it remains sensible in the context of a trust’s mandate and objective.
Opportunity to buy at a discount
As ‘closed-ended funds’, investment trusts have a finite number of shares in issue. Supply and demand are balanced by the stock market through movements in the share price. This can often move away from a trust’s net asset value (NAV), which means investors can sometimes find investment trusts at a discount, when the share price is trading below NAV.
This last point is particularly valid in the current environment, because investment trust discounts have been much wider than usual. Recent analysis from The Association of Investment Companies (AIC) demonstrates that investing when investment trust discounts have been this wide has historically led to higher returns3. Obviously, we need to remember that past performance is not a guide to the future, but this suggests that undervalued opportunities can potentially be found by astute ISA investors.
Investment trust discounts recently at widest levels since the financial crisis
Source: AIC to 31 January 2024
Backing the UK
Investment trust ISAs are also a good way to back British businesses. The UK equity market has had a difficult run, but it has left many UK-listed businesses trading at a meaningful discount to similar companies that are listed elsewhere. This represents a real opportunity should the situation normalise.
Merger and acquisition activity may be a catalyst. Barely a week passes without news of another well-known UK company being acquired from overseas. Policymakers are also intervening.
In the 2024 Spring Budget, Chancellor Hunt introduced the concept of the UK ISA, which will represent an opportunity for investors to shelter an additional £5,000 from the tax authorities annually, as long as they invest it in the UK.
We expect to receive the finer details of this policy in the coming months, but many commentators argue that UK-listed investment trusts should be included in the UK ISA, which would represent a new source of demand that could help to close the prevailing discounts.
Either way, this is an excellent example of how the ISA tax wrapper continues to evolve. From the start, it has been a highly suitable home for investment trusts and that continues to be the case today. Investment trusts are as relevant as they ever have been, particularly for ISA investors.
1 Source: AIC – investment trust assets under management – 11/03/24
2 Source: HM Revenue & Customs – current ISA subscriptions – 22/06/23
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.
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