1 reason why investment trusts could be better buys than the FTSE 100

The FTSE 100 (INDEXFTSE:UKX) may not be worth buying ahead of some investment trusts.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the long run, the FTSE 100 is expected to deliver a total return of around 7-8% per annum. This is relatively impressive and is higher than the returns of most other major asset categories. With tracker funds charging less than 0.5% and tracking the index relatively closely, gaining access to the index has never been easier for investors.

In the long run though, there may be a better alternative for investors who are seeking to obtain a high degree of diversification as well as a high return. Some investment trusts could be better buys than the UK’s main index for this one key reason.

Superior performance

While not all fund managers are able to outperform their benchmarks or the wider index on a regular basis, there are some who can do so. Such managers have been able to generate a total return which is significantly higher than that of the FTSE 100 in the past. In some cases, they have been able to do so without taking substantially higher risks, which could mean that their risk/reward ratios are more favourable than that of the wider index.

Of course, investment trusts with strong track records, and which offer a manager that has been able to consistently demonstrate a high level of skill, may trade at a premium to their net asset value. Demand for their services may be high, but even in this scenario they may be able to beat the wider index in the long run.

Management focus

This ability to beat the market on a consistent basis is not something which all investors or fund managers possess. It could be due to a variety of factors, including strong bottom-up research, or making the right calls on the macro outlook. Either way, history shows that some individuals are able to deliver consistently high returns in excess of the FTSE 100. While their performance may fluctuate just as the index does, focusing on their ability as the key reason to buy a particular trust could be a shrewd move for long-term investors.

In this sense, picking an investment trust may not be all that dissimilar to buying shares in a company. While a number of aspects, such as valuation, diversity and many others, are important when selecting a company or trust to buy, ultimately their future performance is closely tied to the ability of management. If they are able to develop the right strategy given market conditions then the company/trust is likely to be successful. Therefore, it can pay to focus on management strength and ability when a company or a trust being researched.

Takeaway

While the FTSE 100 is an attractive investment for long-term investors, some investment trusts may prove to be superior opportunities. With the right manager at the helm, they can offer a higher level of return in the long run and may therefore be worthy of investment at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »