Like a lot of investors, I am always hoping to beat the stock market. Of course, that it is easier in theory than it is in practice. I have been wondering – could owning shares in more investment trusts potentially help me to do that?
Why investment trusts might give me an edge
Investment trusts contain a diversified mixture of shares. Diversification is a well-established risk management principle, so that already attracts me. On top of that, these investment vehicles can invest in companies that I could not invest in myself because they do not sell their shares publicly. For example, if I want to invest directly in SpaceX, I have no way to do it. But if I bought shares in the Scottish Mortgage Investment Trust, I would gain some exposure to SpaceX as the trust has a stake in it.
Although those features are appealing to me, they would not necessarily help me beat the stock market overall. As investment trusts typically charge a management fee, I could well underperform the market even if the trust buys a broadly representative basket of shares.
But – could I get better results by carefully selecting specific trusts?
Possibly I could, because some investment trusts are actively managed.
Trust managers sift through hundreds or even thousands of shares they could buy and choose only to hold certain ones. The strategy they take may vary. European Assets Trust, for example, focuses on small and medium-sized continental European companies, while Henderson High Income aims to do what it says on the tin.
But like an athlete running a race, just because an investment manager aims to pursue a certain strategy does not necessarily mean success will come.
Partly that will depend on the skill of the manager. It will also depend on broader trends. For example, an Asian-focussed fund like Henderson Far East Income may struggle to perform well if there is a financial crisis in Asia.
If the stars align, though, skilled management or simply the right strategy at the right moment could also lead to excellent returns. If I owned shares in investment trusts with those characteristics, it is certainly possible that I could outperform the market.
Knowing what I am buying
But if I did decide to buy more investment trusts, I would be careful to understand not only the investment strategy but how it is implemented.
One way to try and earn higher income than the market average, for example, is simply to invest in riskier assets. But those assets may go bad, or slash their payouts. So some investment trusts have attractive dividend yields but risky portfolios of assets I would not touch with a bargepole. In such cases, the risk coming home to roost could be a double whammy for me as an investor. Not only might the dividend be cut, but that could lead to the share price falling too, meaning I would lose money on my investment.
So while I think owning some investment trusts could help me beat the stock market, I would take time and do research to find the ones that suit my investment objectives and risk profile.
The post Can buying investment trusts help me beat the stock market? appeared first on The Motley Fool UK.
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C Ruane 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.