How to research investment trusts for your Isa

Ryan Hughes is chief investment officer at financial services firm AJ Bell.

Investment trusts represent a great way to invest, whether you are just starting out or have already established a well-diversified portfolio.

However, they do have some interesting quirks and features that mean it is important to do careful research to fully understand what you are purchasing.

1. How does the trust invest?

Firstly, the strange thing about investment trusts is that many of them have a name that doesn’t say much about what they do.

Scottish Mortgage does not invest in mortgages, Monks is not linked to the church and Temple Bar is not based in Dublin’s famous drinking district.

It is therefore vital to look beyond the name of the trust and take a closer look at what it actually does to see if it fits your objectives.

It could be growth or income, high risk or low risk; There are many options and understanding the approach is key.

2. Who is the administrator?

This leads to the next element, which is to take a close look at the fund manager managing the trust.

Trusts operate with independent boards just like a company and these boards have the power to hire and fire fund managers.

Therefore, when looking at past performance, it is important to ensure that the track record relates to the current trustees, as many investment trusts have changed who runs them in recent times.

When looking at the trustee, research should focus on how they invest, as this helps to understand whether the trust may be suitable for your objectives.

This means looking at where they invest geographically, the type of investment they buy, the types of companies they buy, and how much risk they typically take.

Ryan Hughes: Investment trusts typically cost less than open-ended funds

3. What do company accounts reveal?

As investment trusts are companies, they must prepare a set of reports and accounts twice a year.

In this document there is an explanation from both the board and the fund managers of what the trust does and how it does it.

These documents are a great starting point for investors who want to investigate an investment opportunity, even if all the account numbers don’t make sense.

4. Does the trust trade at a discount or premium?

Investment trusts have some different characteristics to open-ended funds and one of the key differences is that they can trade at a discount or premium.

An investment trust is listed on the stock market and therefore sometimes its price does not reflect the value of the underlying investments.

If the price is below the value of the assets, then it is trading at a discount, while if it is above, it is trading at a premium.

Given this situation, it is worth looking at the trust to understand how it has operated previously and how it currently operates. Trading at a deep discount may seem like you’re getting a bargain, but there could be a good reason why its price doesn’t reflect the assets.

Likewise, if a trust trades at a premium, you need to be very sure that you are willing to pay more than it is worth.

Both situations are common and neither is necessarily bad, but it is important to understand why this happens.

Investment trust boards often have a policy in place around discount or premium and therefore discovering this will help to detect what the likely discount or premium might be in the future.

5. Do you have debt?

Another feature of investment trusts is their ability to borrow money to try to improve returns, known as leverage.

Many investment trusts use this approach, but it is important to remember that, just as it can enhance good returns, it can also exacerbate poor returns.

Therefore, checking a trust’s current level of leverage and how it has been used historically by the manager is a sensible approach as it gives an idea of ​​the level of risk being taken.

6. How much does it cost?

One of the advantages of investment trusts is that they typically cost less than open-ended funds.

The ongoing charges figure shows how much an investor paid over the last 12 months and the average UK equity investment trust has an OCF of 0.63 per cent compared to 0.88 per cent for the average open-ended equity fund of the UK actively managed.

This may not seem much different, but in the long run it can have a huge impact on your investment.

This lower cost is partly due to the independent board that negotiates fees with the fund managers and also due to lower running costs due to the different structure that keeps sales and marketing costs low.

However, it is worth noting that as investment trusts are listed on the stock market, there are higher trading costs to consider.

7. How much does the trust yield?

An attractive feature of an investment trust is that it does not need to pay out all of its income each year as a dividend.

This means that in good years you can retain some income to use in tougher years to keep dividends attractive.

Therefore, it is worth looking at the dividend coverage figure, as it shows how much of the current yield can be paid out of reserves.

The higher the figure, the better the chances of the trust maintaining or increasing its income in difficult times.

8. Where can you find information about trusts?

Investment trusts are excellent investment vehicles that offer investors a wide variety of options for different approaches.

The Association of Investment Companies that represents investment trusts. has a great website which contains a lot of useful information about them.

This includes educational material that explains in more detail some of the areas covered here, as well as many specific statistics to help understand what particular investment trusts are doing.

9. Review the performance of your investment trusts.

It’s important to remember that if you choose investments, the work doesn’t end once you’ve invested.

Ongoing monitoring is as important as initial research, as trusts can and do change, so keep an eye on your portfolio to ensure your investments remain suitable to meet your objectives and risk level.