I think investment trusts are a great way to invest in the stock market without picking individual equities.
These trusts are essentially run as investment companies. They can own baskets of investments of their choosing. And they are not limited to stocks and shares. These corporations can own private businesses, real estate, other investment trusts and international equities.
The structure of investment trusts
The reason why investment trusts can own so many different assets comes down to the structure. These companies are limited by shares, which are freely traded on the market. This gives them a steady capital base, which they can invest. This structure is known as a closed-ended structure.
By comparison, regular so-called open-ended investment funds have to buy and sell assets to fund investor withdrawals. This means they have to own investments they can sell on a day-to-day basis, or it could cause problems.
That is just what happened several years ago with Neil Woodford’s flagship equity fund. The fund manager could not sell his private investment holdings fast enough to meet outflows.
One drawback of this approach used by investment trusts is the fact that they can trade at a significant discount to the value of their assets. This could present an opportunity for investors to take advantage of, although an investment discount does not guarantee the trust is undervalued.
These advantages are why I own a portfolio of investment trusts. So heading into 2022, I am looking to buy the three trusts outlined below to increase my portfolio’s exposure to several key investment themes.
Key investment themes
3I Infrastructure owns a portfolio of infrastructure assets around the world. This is an excellent asset class to own in an inflationary environment. Not only does the income generated tend to rise in line with inflation, but the value of the assets also tends to grow.
With inflation building worldwide, I would own 3I for these reasons. The company also offers a dividend yield of around 3%, and management is always on the lookout for new portfolio additions.
Aberdeen Asian Income is another investment trust I would buy. I want some exposure to Asia in my portfolio, especially income stocks. The investment trust owns a portfolio of income stocks across the region, including some of Asia’s fastest-growing companies. As I do not know much about the region, I am happy to outsource stock picking to managers who may know more.
Finally, I would buy abrdn UK Smaller Companies. I want some exposure to the UK economy in my portfolio as it recovers from the pandemic. Investing in smaller businesses is quite tricky, but the returns can more than compensate for the risk involved. I think owning the trust will reduce the risk of investing in these equities while providing exposure to the small-cap sector.
The most significant risk of using this investment trust approach is that these trusts may underperform the market. I will also have to pay more money in management fees. These fees could eat away at returns, especially if the companies’ investments underperform the market.
