Investment Trust Insider - Opening the door to investment trusts

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Ian Cowie: happy birthday ISA, well done equity income trusts!

Ian Cowie: happy birthday ISA, well done equity income trusts!

They won’t be putting out the bunting for many street parties to celebrate this fact but next April will mark the 20th anniversary of the launch of individual savings accounts (ISAs).

Before your eyes glaze over, consider why serious savers and investors should be grateful for ISA’s innovation, allowing us to keep more income and growth or a mixture of both.

Shareholders in investment trusts have more reason than most to celebrate ISAs because - like their forerunners, personal equity plans or Peps - they helped demonstrate how this form of pooled fund enjoys an important structural advantage over all others.

Never mind the history. Here and now, rising numbers of people making use of newish pension freedoms should also be focusing on how investment trusts can make the most of tax-efficient income. These trusts have a unique ability to smooth dividend distributions, sustaining them and raising them over longer periods of time than any other form of pooled fund.

Never mind the theory. How did it work in practice? New research from the Association of Investment Companies (AIC) shows that the average UK Equity Income investment trust increased dividends by an average of 4.5% per annum over the two decades since ISAs were launched.

To put that figure in perspective, the rate of ascent was more than 50% higher than the average annual rate of inflation during those 20 years of 2.8%. So investment trusts’ unique ability to retain up to 15% of underlying returns in good years to top up dividend distributions in bad years paid off consistently.

It not only delivered an income shareholders could to some extent rely on - subject to the usual caveats about stock market volatility - but also an income that tended to rise much faster than inflation eroded the real value or purchasing power of money.

Or, as one cynic told me, real returns and total returns are all very well but no pensioner ever paid a gas bill with them; you need the cheques to turn up on time and in the expected values.

Now here’s the icing on the cake. When ISAs were launched in April, 1999, the average investment trust share was priced at a discount to net asset value (NAV) of 15%. But rising awareness of the value this form of pooled fund provides has helped increase demand and prices, causing the average discount to NAV plunge to just over 2%.

Lest those numbers seem like tedious technicalities, consider how the narrowing of discounts helped boost capital returns. The average UK Equity Income investment trust more than trebled shareholders’ money over the last two decades, delivering a 252% capital return.

Bitter experience has taught me that many people find percentages baffling but everybody understands numbers with pound signs in front of them. So what diid all the above mean in cash terms?

Statistics from independent statisticians Morningstar show that £100,000 invested in the average UK Equity Income investment trust two decades ago would have generated income of £3,025 during the first year. By last year, the annual dividends distributed would have more than doubled to £7,036.

Perhaps even more eye-stretching, Morningstar calculates that £100,000 invested in the average UK Equity Income investment trust over the last two decades would have generated total dividends or income payments of just over £98,000 plus additional capital growth of £252,280.

There are plenty of reasons for investors to be fearful about the future. But the 20th anniversary of ISAs - spanning a period that includes the crash and the global credit crisis - does at least provide some reasons to be cheerful.

Whether you held UK Equity Income investment trust shares in an ISA or a pension, they have weathered severe economic storms in the past and - although it may irritate regulators for me to say so - will probably do so again in the future.

Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.


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