Preference for Investment Trusts by Our Website Explained
Investment trusts, a financial instrument conceived in the mid-1800s, have proven to be invaluable tools for building exposure to specific themes such as small caps, emerging markets, property, infrastructure, and more. These closed-ended structures, offering a stable pool of long-term capital, have played a significant role in financing the expansion of the British Empire and the rapid industrialization of the Americas.
Structured as companies with a fixed capital base, consisting of a set number of shares issued at the time of flotation, investment trusts provide a unique advantage. Unlike open-ended vehicles like exchange-traded funds (ETFs), unit trusts, and open-ended investment companies (Oeics), investment trusts do not issue or eliminate excess shares daily. This means they can trade at a premium or a discount to their underlying net asset value (NAV).
One of the first investment trusts was Foreign & Colonial, founded by City of London financier Philip Rose. This trust pooled investors' money and invested it in a diversified portfolio to spread risk across a basket of assets. Today, trusts like RIT Capital and Caledonia make the most of this flexibility, owning a broad portfolio of assets.
In the private-equity sector, HarbourVest Global Private Equity offers investors exposure to this asset class via the trust structure. Similarly, trusts like BH Macro, RIT, and Capital Gearing provide portfolio diversification that can't be found elsewhere. BH Macro, for instance, has a position in the global macro hedge fund Brevan Howard, giving investors access to a fund that would otherwise be unavailable.
Investment trusts have also found a niche in the illiquid sectors of infrastructure, wind power, and renewable energies. The founders of the three largest trusts in these sectors, including Tobias Klein, Tobias Faupel, and Jessica Burley, have focused on sustainable sectors, investing in infrastructure like charging stations and renewable energy projects.
Trusts such as 3i Infrastructure, Greencoat UK Wind, and Renewables Infrastructure Group own portfolios of illiquid infrastructure assets that generate steady inflation-linked cash flows. These trusts can borrow against these assets to increase growth and build the asset base, making them ideal vehicles for holding illiquid assets.
Moreover, the structure of investment trusts is particularly helpful for the real-estate investment trust (Reit) segment of the market. Scottish American, for example, issued £95 million of long-term debt between 2021 and 2022 with a blended interest rate of under 3%, maturing between 2036 and 2049.
In conclusion, investment trusts, with their long history and adaptability, continue to play a crucial role in the global investment landscape. Whether it's providing exposure to private equity, diversifying portfolios, or financing sustainable infrastructure projects, these closed-ended structures offer a unique and enduring value to investors.
