Investment Trust Saving Schemes
Investment Trust Savings Schemes (ITSS) are low cost plans that deliver diversified exposure to the stock market for regular investors.
An ITSS enables the investor to embark upon a long term investment strategy by making small regular investments into the stock market; some from as little as £10 per month.
The schemes tick two of the most important boxes for a successful investment strategy – they can accumulate a significant sum over the period of a long term investment and the cost of ownership is low.
Over the longer term the investor will acquire shares in the scheme at differing prices, according to the level of the market at the time of purchase; the invested sum will buy fewer shares when the price is high and more when the price falls.
Smoothing out the peak and troughs in prices caused by market volatility is called pound cost averaging; the value of the overall investment can be further boosted if dividends paid by the trust are reinvested, thereby increasing the number of shares held and in turn, future dividends received.
‘they can accumulate a significant sum over the period of a long term investment and the cost of ownership is low’
One of the keys to success with any investment strategy is keeping costs as low as possible, and that is a particular strength of ITSS; they typically have either very low, or no, dealing costs – often charging just Stamp Duty at 0.5% – which is a considerable advantage over other investments.
The first ITSS was launched in 1986 by Foreign and Colonial, originator of the Foreign and Colonial Investment Trust established in 1868 ‘to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks’
The scheme allowed investors to invest small sums of money with commission limited to 0.2%; such was its success that it wasn’t long before other management groups followed.
More than twenty investment trust managers now offer schemes, and in addition to an ordinary share plan investors can shelter their investments in tax efficient ISA wrappers or use them to plan for retirement by lodging them in a SIPP.
ITSS offer the investor considerable flexibility, and a number of managers offer online access for buying and selling shares or retrieving valuations and reports.
Those considering investing in an ITSS should shop around as there are differences in the way managers charge members of the scheme; some levy an annual fee for an ISA, whilst others charge an annual management fee.
Some managers charge a commission for purchases, whilst others do not; it is quite common for those selling their holding to be charged ‘on the way out’, but overall ITSS charges are reasonable.
There is considerable choice for the ITSS investor with a large number of types of trust to select from ranging from big, traditional trusts, to private equity, country specialists, commercial property and now peer to peer lending.
It is possible to build a diversified portfolio of investment trusts through regular contributions to a selection of trusts and managers, although switching between managers or platforms can be time consuming and sometimes expensive so it is worth looking at the small print at the bottom of the fees and charges page.
‘(over ten years) UK smaller companies would have yielded £48,223, a hike of 302%’
ITSS are particularly well suited for longer term investments which ride out short term volatility and allow the compounding effect of dividends being paid on dividends.
As an example of what can be achieved, according to trade body, the Association of Investment Companies, £100 invested monthly into a global growth trust for the last ten years would have grown by 162% – £31,475 for an outlay of £12,000.
A similar scenario invested in a global emerging markets trust would have delivered £46,118, an increase of 284% and UK smaller companies would have yielded £48,223, a hike of 302%.
Direct to consumer platforms such as Alliance Trust Savings and Hargreaves Lansdown make ITSS easily accessible with the additional benefit that the investor can see a consolidated view of all of their investments.
Full details of managers offering ITSS can be obtained from the Association of Investment Companies at www.theaic.co.uk.