Best UK Investment Trusts in 2020

Investment trusts are among the best assets you can own to grow your wealth over time. These assets have a history not only of increasing in value year after year but also of returning an increasingly large dividend to investors each year.

In this guide, we’ll take a closer look at what investment trusts are, how they work, and how they differ from investment funds. Importantly, we’ll focus on how putting your money in the best investment trust can help you profit steadily and predictably over the long term. We’ll also highlight three of our favourite brokerages for buying and selling investment trusts in the UK.

What are Investment Trusts?

Investment trusts are essentially a type of fund, in which a money manager takes in investors’ money and reinvests it across the stock market and other assets like energy, infrastructure, and real estate. Some investment trusts specialise in a particular market, for example, there are stock investment trusts and real estate investment trusts, while others distribute investors’ money across a wide expanse of asset classes and countries.

One important thing to know about investment trusts is that they’re traded on the stock market just like a traditional company. The share price of an investment trust isn’t always matched exactly to the value of the assets that the trust itself invests in. Rather, investment trust prices go up and down according to share supply and demand, just like prices for any other company.

Examples of Investment Trusts

There are hundreds of investment trusts available in the UK, but some of the best investment trusts are offered by just a handful of companies. Aberdeen investment trusts and Baillie Gifford investment trusts, for example, each offer a variety of investment trusts that you can buy on the open market (you don’t need to hold a trading account with Aberdeen or Baillie Gifford). Other major players in the UK investment trust space include Blackrock and Allianz.

The trusts managed by these financial institutions span the gamut from stock-only trusts to real estate investment trusts to trusts that invest in emerging economies. The companies’ most popular trusts are among the best investment trusts for income. As an example, Ballie Gifford’s Scottish Mortgage investment trust is a global real estate investment trust with a three-year return of more than 75% and an annual dividend yield of 0.6%.

Best Brokerages for Buying Investment Trusts

Since investment trusts are traded as you would buy shares on the open market, it’s important to find a reliable, low-cost brokerage for trading them. To help, we’ll highlight three of our favourite UK brokerage for buying and selling investment trust shares.

Investment Trusts vs. Funds

UK investment trusts and investment funds are very similar on the surface. After all, both types of investments pool investors’ money and reinvest it in the stock market or other assets.

But, there is a major difference in the way that investment trusts fundamentally work that differentiates them from investment funds. Investment trusts are closed-ended, meaning that the amount of money the trust manager has to invest doesn’t change when new investors buy into or leave the investment trust. This is why investment trusts are bought and sold as shares, rather than by investors directly putting money into a pool.

The fact that investment trusts are closed-ended gives trust managers much more freedom and financial stability compared to investment funds. As an example, real estate investment trusts can put money into development projects that may take years to see a return because the trust manager knows that the trust won’t be short of cash in the interim if investors decide to pull out.

There are a few additional ways in which investment trusts in the UK stand out from traditional funds. Investment trusts are able to borrow money to fuel new investments. That increases their potential return, as well as their potential risk. On top of that, UK investment trusts are allowed to keep up to 15% of their profits in any year to put towards future investments or to use as a cash stockpile for future dividend payments.

Advantages of Investment Trusts

The number one reason to opt for an investment trust is that these assets historically offer excellent returns. One of the best investment trusts of recent years, the Blackrock Throgmorton investment trust, returned more than 40% in 2019 and has seen a three-year return of more than 100%. Investment trust returns are typically higher than what funds return, in no small part because trust managers have more freedom to invest in long-term projects.

Another major reason that many investors like investment trusts is that they offer high dividends that consistently grow over time. There are more than 20 investment trusts in the UK that have increased their dividend payouts every year since they launched. This is where the option to sock away 15% of profits during good years comes in handy. Investment trusts are able to use that stored money to maintain high dividend payments even during years that aren’t so great.

The only significant downside to investment trusts is that since they’re traded as shares on the open market, you’re subject to trade commissions and other brokerage fees when buying and selling them. However, this drawback can be entirely mitigated by opting for a brokerage that waives trade commissions.

Conclusion

Putting your money in the best UK investment trust is a great option for growing your money over-time to save for goals like retirement. Investment trusts can return steady income through dividends, and they often yield significantly greater returns than similar investments like funds. The diversity of investment trusts is an advantage, too, since you can diversify your portfolio by investing in a mix of different asset classes through multiple trusts.

Since investment trusts are traded on the stock market, it’s also important to find a trustworthy and low-cost brokerage to move your money in and out of trusts. With our recommendations in mind, you can find the broker that’s best suited to your needs and get started with trading investment trusts today.

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