How to research investment trusts for your Isa

Ryan Hughes is head of investment partnerships at financial services firm AJ Bell.

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

However, they do have some interesting quirks and features that mean careful research is important to fully understand what you’re buying.

1. How does the trust invest?

First of all, 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 affiliated with the church and Temple Bar is not based in Dublin’s famous drinking area.

So it’s vital to look beyond the name of the trust and take a close look at what it actually does to see if it fits your goals.

It could be growth or revenue, 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 item, which is taking a close look at the fund manager who manages the trust.

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

Trusts operate with independent boards just like a business, 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 managers, as in recent times many investment trusts have changed who runs them.

When looking at the trustee, your research should focus on how you invest, as this helps you understand whether the trust may be a good fit for your goals.

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 tend to take.

3. What do the company accounts reveal?

Since 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 administrators of the fund about what the trust does and how it does it.

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

4. Is the trust traded at a discount or premium?

Investment trusts have a few different characteristics than open-end 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 its price sometimes does not reflect the value of the underlying investments.

If the price is below the value of the assets, then it is quoted at a discount, while if it is above, it is quoted 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 might seem like you’re getting a bargain, but there could be a good reason your price doesn’t reflect the assets.

Similarly, if a trust is trading at a premium, you should be very sure that you are willing to pay more than it is worth.

Both situations are common and neither can be bad, but it is important to understand why a trust might operate this way.

Investment trust boards often have a set policy around discount or premium and therefore finding out this will help to spot 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 trustee 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 usually cost less than open-end funds.

The ongoing charge figure shows how much an investor paid over the last 12 months and the average UK stock investment trust has an OCF of 0.70 per cent compared to 0.90 per cent for the open-ended stock fund UK average actively managed.

This may not sound like much of a difference, but in the long run it can have a huge impact on your investment.

This lower cost is due in part to the independent board that negotiates fees with the fund’s managers and also to lower operating costs due to the different structure that keeps things like 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?

One attractive feature of an investment trust is that you don’t need to pay out all of your income each year as a dividend.

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

This is exactly what happened in 2020, when many companies cut their dividends but investment trusts were able to use their reserves to maintain or increase income.

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

The higher the figure, the better the chances that the trust will maintain or increase its income in difficult times.

8. Where can you find information on trusts?

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

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

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

9. Review the performance of your investment trusts.

It’s important to remember that if you choose investments, the job isn’t over once you’ve invested.

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