How financial advisers use investment companies with clients

Investment companies (investment trusts) can be used to benefit a range of clients seeking income, growth or both. In these case studies, which feature real and hypothetical client situations, advisers describe how they use investment companies to help clients meet their financial goals. We also include a case study from James Burns, partner and at Smith & Williamson, who describes how he uses investment companies within the firm’s risk-profiled model portfolios.


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Using investment companies for growth

Enzo Maffioli, founder, Blyth-Richmond Investment Managers

For a number of years we managed a portfolio for a client based in the South West. She was 50 years old at the time, had a totally relaxed approach to risk and did not require income. This was some 20 years ago when investment companies were deemed to be a high-risk approach to investing. However, in view of her risk profile and our conviction that investment companies presented the best opportunity for capital appreciation, we established a portfolio for her with a heavy weighting towards investment companies.

When we were eventually invited to meet the client’s daughter, the client was able to point out somewhat triumphantly that the portfolio had beaten the relevant indexes every year since inception, probably a bit of an exaggeration. Why did the portfolio outperform? Obviously, the client’s attitude to risk was important, but also the fact that she had invested in investment companies, whereby gearing and lower charges had made a considerable impact.

Had we invested in investment funds, apart from one or two of the most aggressively managed, I doubt if we would have achieved this result. I think this demonstrates that investment companies present a great opportunity to enhance performance.


A person smiling next to a body of waterDescription automatically generatedUsing investment companies for income

James Pigott, founder, Pigotts Investments

Our client was an 89-year-old man moving into a care home. His son and family were also clients. To fund the care home costs, the client was considering a number of options including renting out his property or using equity release. However, unfortunately none of these options would have adequately covered the care home costs while also providing reasonable assurance that the money would last long enough.

Our recommendation was to purchase a portfolio of investment companies with proceeds from the sale of the client’s property. Yields of these investment companies ranged between 5% and 7%, helped by the fact that the stock market was trading at low levels at the time. The underlying investments were mostly equities, but also included some fixed income, credit and alternatives.

The rationale for the recommendation was that the natural income from the portfolio was likely to be sufficient to pay the monthly care home charges with some inflation protection: dividends from the portfolio had grown at 2% to 3% historically. Investment companies have a good track record of increasing dividends, using revenue reserves to support income when market conditions are poor. And the solution also allowed the client flexibility. Had the income not been sufficient, it would have been easy to sell shares to supplement it.

The client lived till 103, with the natural income from the portfolio being sufficient to support him for the rest of his life. The capital value of the investment company portfolio also increased over this time, leaving the family with a meaningful legacy.


Using investment companies when saving for children

Paul Chilver, associate and financial planning manager, Birkett Long IFA

We often work with clients who are looking to put some money aside for their children or grandchildren. The following scenario is based on the approach we might take for such a client.

The clients in this scenario are a couple with two young children, aged three and five. They want to provide each child with money towards education costs or a house deposit, but they also want to retain control over when and how to hand over the money when the children reach adulthood. The couple are high earners and typically invest their entire ISA allowance each year.

In this scenario one solution we would look at would be for the parents to open a designated account for each of their children in the joint names of the parents. This way, the money remains under the parents’ control even when the children reach adulthood. One potential downside of this arrangement is that the money is taxed as though it were the parents, but this can be mitigated by investing in growth-focused investment companies with very low or zero yields, for example in the UK All Companies, UK Smaller Companies and Asia Pacific sectors. At the time money is distributed to children, capital gains tax can be mitigated by using the couple’s combined capital gains allowances.

Why investment companies? Over a long period of time, the performance of investment companies tends to be better, partly due to lower charges. Gearing can also enhance returns, for example by giving investment company managers the flexibility to invest after a deep market fall – though of course it does add risk. The long time horizon in this case allows time to ride out the additional volatility that can come with investing in investment companies.


A person wearing a suit and tie smiling at the cameraDescription automatically generatedUsing investment companies to access alternative assets

James Burns, partner, investment management – funds, Smith & Williamson Investment Management LLP

At Smith & Williamson, we use investment companies across our range of risk-profiled model portfolios, all the way from our Defensive portfolio which has a Dynamic Planner risk profile of 3 up to our Dynamic Growth portfolio at risk level 8. Exposures to investment companies within these portfolios range from 13% for the Defensive portfolio to 29% for the Dynamic Growth portfolio.

The closed-ended nature of investment companies means that we can access less liquid areas of the market, such as infrastructure bonds, in what we believe is the most appropriate vehicle. These types of assets are very attractive to us in terms of returns and diversification and highlight the importance of considering investment companies when constructing a portfolio in the current environment.

Some details in the adviser case studies have been changed to protect clients’ anonymity.