Why investment trusts could be perfect for your 2018/19 ISA

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The end of the tax year draws nigh, and that means a fat new ISA allowance of £20,000. You can invest anything up to that amount in your 2018/19 ISA, and when you retire and take cash out to spend, you won’t pay a penny in tax.

Cash ISAs offer pretty pitiful interest rates, so what can you do you do if you want to take advantage of the superior long-term returns from UK shares?

A lot of folk hand over a chunk of their cash to professional fund managers to invest for them, but even the best of those managers can be trying to serve two masters. They obviously want to earn good returns for you so that you will leave your cash with them, but they also have to generate profits for their shareholders by taking a slice for themselves by way of charges.

Wouldn’t it be great if you could get round that dilemma? Well, actually you can, and there’s a form of managed fund that I think is perfect for holding in an ISA. They’re called Investment Trusts and they work in a unique way.

Investment trusts

What happens is that the initial investment funds are provided by investors when the trust floats on the stock market, and those people get shares in the trust. Later, if the trust wants to enlarge its capital, it does so via a new share issue.

And then to invest, we just buy and sell the shares. The investors, the owners of the money, are the shareholders too. And they get to enjoy all of the bottom-line profit every year, either through reinvestment for growth, dividends, or a combination.

Some companies even provide specific investment trust ISAs, which offer monthly investment schemes. The cash goes to buy shares in individual trusts, with the only extra cost being the typically low annual ISA management charge itself — which you have to pay no matter what kind of ISA you choose.

The alternative is to put investment trust shares directly into your stocks and shares ISA, alongside any other company shares you choose — you’d just buy them through your ISA broker the same way.

But what trusts are there and how well do they do?

Income, growth

Aimed at income, The Edinburgh Investment Trust has pretty much matched the FTSE 100 in terms of growth. But it’s also been paying dividends of around the 3.5%-4% level, and that’s better than the index (and the dividend alone wipes the floor with cash ISA interest rates). The shares have actually dipped a little of late and are trading at a discount to net asset value of around 10%, which makes them look like a bargain to me.

If you’re looking for growth, the Witan Investment Trust has easily outstripped the FTSE 100 over the past five years and longer. You’d get some global exposure too, as only around a third of its investments are in the UK market. That highlights another advantage of an investment trust — you’re getting diversity thrown in as well.

And, as I recently explained, you can add a bit of emerging markets focus if you wish, providing a lower risk foray into places like China and the East than just investing in a handful of individual companies.

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Alan Oscroft 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.