Trust Issues: Why younger investors are missing out on Investment Trusts

At our fourth WIN* event, we were joined by an exceptional panel:

Annabel Brodie-Smith, Communications Director at the Association of Investment Companies, who has spent 28 years championing investment trusts and made a compelling case for why private equity discounts and long-running dividend heroes deserve a closer look.

Laura Suter, Director of Personal Finance at AJ Bell, who shared platform data showing consistent investment trust adoption across all age groups, and a timely reminder to be critical about where your investing information comes from.

Katie Waite, Director at RBC Brewin Dolphin, who gave a practical framework for matching investment trusts to different time horizons, whether you're saving for a pension, a house deposit or something in between.

Moderated by Gavin Lumsden, Head of News at QuotedData and one of the most experienced investment trust journalists in the country.

We've written up the key insights in a new blog post. If you're new to investment trusts, or know someone who is, it's a good place to start.

You can watch the event recording here. 

Key takeaways

The average investment trust holder is between 60 and 65 years old. That statistic tells a story of a missed opportunity. Because if there's one investment structure that younger investors stand to benefit from most, it's the investment trust. The trouble is, most have never heard of them.

WIN*, Law Debenture's financial education initiative, exists precisely to change that. At the latest event, a panel of experts from across the investment industry explored why investment trusts deserve a place in the portfolios of younger and newer investors. Here is what came out of that conversation.

So, what exactly is an investment trust?

An investment trust is a company listed on the stock market, much like Barclays or Marks & Spencer, except that instead of selling goods or services, it invests in a portfolio of other companies or assets. A professional fund manager makes the decisions about what goes into that portfolio, so you don't have to do the research yourself.

You buy and sell investment trust shares on the stock market through an investment platform, just like any other share. And this is where investment trusts start to get interesting, because they have a few structural features that make them particularly well suited to long-term investors.

A fixed pool of shares. Unlike open-ended funds, which expand and contract as investors pile in and pull out, investment trusts have a fixed number of shares. This matters because the fund manager never has to sell investments at an awkward moment to meet redemptions. They can focus entirely on what's best for the portfolio over the long term.

Access to harder-to-reach assets. That fixed structure also allows investment trusts to invest in things that are genuinely difficult to access any other way: private companies like SpaceX or Anthropic, infrastructure such as wind farms and toll roads, commercial property and smaller emerging market companies. For many private investors, investment trusts are the only realistic route into these types of assets.

The ability to borrow. Investment trusts can borrow money to invest, a practice known as gearing. Done conservatively (the sector average is around 10%), this can amplify returns over the long term. It does also amplify losses in downturns, so it's worth understanding, but for a long-term investor it's a genuine structural advantage.

Dividend smoothing. Investment trusts can hold back up to 15% of the income they receive each year, building a reserve. In tough times (a pandemic, a financial crisis) they can draw on that reserve to keep dividends growing rather than cutting them. The result is 20 AIC "dividend heroes": investment trusts that have increased their dividend every year for more than 20 consecutive years. Ten of those have done so for more than 50 years.

An independent board. Unlike most other fund structures, investment trusts have a board of directors whose job is to look after shareholders' interests. They scrutinise the fund manager, oversee service providers, and answer to shareholders at the AGM. You can vote. You can ask questions. It's your investment.

The numbers make a compelling case

The long-term performance figures are striking. The average investment trust is up 22% over the past 12 months, 30% over five years, and 179% over ten years. And if you'd invested the full ISA allowance every year since 1999 (a total of £346,560), there are 68 investment trusts that would have turned that into over a million pounds.

Why younger investors are actually well placed to benefit

Here's the paradox. The features that make investment trusts so attractive (long-term compounding, gearing, access to illiquid assets, dividend reinvestment) are features that reward patience. And younger investors have something the 64-year-old average investment trust holder doesn't: time.

For anyone with a ten-year-plus horizon, you can ride out market volatility, invest in longer-term trends, and not worry too much about short-term pullbacks. The compounding effect of reinvested dividends over decades is substantial. And a discount (when a trust's share price trades below the actual value of its assets) can be a genuine buying opportunity that turbocharges returns when it narrows.

Data from investment platforms shows that around 12% of investors' portfolios are held in investment trusts across all age groups. Scottish Mortgage, F&C Investment Trust and Polar Capital Technology consistently top the charts regardless of the investor's age. The appeal, it seems, is universal when the story is told clearly.

Where to start: thinking about your time horizon

Before investing a single pound, it is worth thinking about what you are investing for and how long you have. Different time horizons call for very different approaches.

Ten years or more (retirement, long-term growth): With time on your side, you can consider equity-heavy portfolios and take advantage of investment trusts that invest in emerging markets, smaller companies or long-term themes like renewable energy. This is where gearing and the discount opportunity can really work in your favour.

Five years (saving for a house deposit): More care is needed here. Markets can fall 20% within a given year even in broadly positive years, and you do not want to crystallise a loss just before you need the money. More defensive multi-asset trusts (such as Ruffer or Capital Gearing Trust) aim to protect capital in difficult conditions while still doing better than cash in real terms.

One to three years (a holiday, maternity leave): Keep it in cash. Simple as that. The risk of a poorly timed market fall is not worth taking over this short a period.

You don't need a lot of money to get started

One of the most persistent myths about investing is that it's for wealthy people with large sums to deploy. It isn't. Many platforms allow you to start investing from as little as £25 a month. That's a small enough amount to start building knowledge and confidence without taking a risk that keeps you awake at night.

The same logic that applies to running a marathon applies to investing. You wouldn't attempt 26 miles on day one. You start small, build up your fitness, and increase the distance as your confidence grows. With investing, the most important thing is simply to begin.

Platforms have made this easier than ever. You can open an account in minutes, invest via an app on your phone, and research trusts using tools on sites like the AIC's aic.co.uk, which brings together performance data, discount levels, gearing, charges and more in one place.

What about social media and AI?

Research suggests 85% of 18 to 40 year olds use social media to influence their investment decisions. The democratisation of financial information is broadly a good thing, but the quality and reliability of sources varies enormously. Treat what you find on social media as a starting point for research, not a recommendation.

A similar note of caution applies to AI. It can be a useful first step for thinking through investment questions, but it's only as good as what you put in. Any output should be followed up with your own research before making any decision. The AIC website is a solid place to continue that research, offering data and analysis on every investment trust in the market.

The broader picture: investment trusts are changing

The sector itself is evolving. Record numbers of mergers, acquisitions and fee reductions have taken place in recent years. Shareholder activism has focused minds on discounts, corporate governance and accountability. And efforts are under way to target a younger generation of investors, including through simpler digital resources and broader social media campaigns.

The average age of investors on platforms has already fallen, from around 55 five years ago to 49 now. The direction of travel is clear.

The bottom line

Investment trusts offer younger investors something genuinely useful: access to a professionally managed, diversified portfolio that can reach parts of the market other structures cannot, with the added advantages of independent oversight, gearing and dividend smoothing. Their long-term performance record is strong. Their structures reward patience. And they have never been easier or cheaper to access.

The fact that the average investment trust investor is 64 is not a reflection of who benefits most from them. It's a reflection of who has heard of them.

That's what WIN* is here to change.

Legal disclaimer: We are not authorised to give financial advice. We recommend that you speak to a stockbroker or independent financial adviser before investing. To find out more about these professionals you can visit the Association of Investment Companies website where they have a detailed guide. 

Please remember that past performance is not a guide to future performance and that the value of an investment and the income derived from it can fall as well as rise and that you may not get back the amount originally invested. Nothing on this website should be construed as an investment recommendation or investment advice.