The landscape for the best investment trusts has been uncertain since the Covid-19 pandemic began. With great fluctuations in value, 2021 has largely been about recovering growth.
From year to year, what constitutes “the best” investment trust changes based on numerous factors. For example, volatility from the pandemic has affected the smaller cap trusts the most. Commodities, small companies, and emerging markets have all had dramatic increases over the past year. That said, the landscape can change quite rapidly, and it’s best for investors to not become complacent.
To stay ahead and increase your chances of investing in a successful trust, be sure to have a dependable selection process. That way, even as trust ratings rise and fall, you can be sure to always find the best investments.
What makes a good trust?
Traditionally, a good investment trust is one with low fees and high returns. Yet even though fees are listed upfront, returns are never guaranteed. To make a solid decision, investors need to dig deeper.
Identifying the best investment trusts is all about the quality of your data. Before we delve into any of the factors you need to evaluate, you should first be certain that your data source is trustworthy and provides as much information as possible. The Association of Investment Companies (AIC) is one such source, as they review all investment trusts.
Once you have established where you plan to draw your information from, you’ll want to filter investment trusts. Geography, assets, sector, ESG criteria, and fee structure are all common filters.
Generally, the best investment trusts have low fees, high dividend payouts, and a fairly stable track record. However, these aren’t the only criteria you should look at. For fees, you ideally want to pay less than 0.75% per trust.
When you invest in a trust, you are also investing in a business, so you will want to review company financials. In particular, you will want to read the potential investment trust’s documentation to truly understand its long-term profitability.
One criterion that is often overlooked is the equity-debt ratio. Debt isn’t necessarily an indicator of a poor investment, but it can help you better understand potential liabilities with your investment.
Another question to ask yourself is whether or not the trust is offering a premium or discounted price. What is the reason for these special deals? Is the trust in trouble, or is it simply a marketing strategy? You will want to be thorough to ensure that any discount is truly worthwhile.
Finally, you’ll want to review the team behind the trust. What’s their track record? Their successes? Their losses? Again, while a successful team does not guarantee success, it can give you an idea of the potential risks.
Other trust considerations
While it’s important to properly investigate the best investment trusts, you’ll also want to see how this trust will affect your overall tax burden. Typically, these trusts are taxed as income, not as capital gains. At this point, you might call on your tax professional or CPA to help you strategically manage your current trusts and future investments.
You will also want to try and project how these trusts will grow over time. Although absolute accuracy is difficult, you should be able to get an idea of how this investment will assist you in the long term.
Finally, you’ll want to leverage a diversified portfolio. A portfolio made up entirely of high-growth companies can offer significant returns, but also carries higher risks.
Investment trusts are a critical component of a solid growth strategy. However, success lies in finding the trusts with the highest likelihood of success. While returns are never guaranteed, recognizing trends and filtering your investments by certain criteria will better your chances.
Researching company financials, analyzing their fee structure, and reviewing their team’s success rate are all factors that can help you differentiate between a decent investment and a great one.