You win some, you lose some

For advisers whose clients have investment trust exposure, Rachel Reeves’ first budget brought mixed news. The new Labour Chancellor’s announcements will provide support to certain trusts – and even the sector as a whole – but there are potential downsides too.

First the good news. While increases in capital gains tax (CGT) rates will mean some investors eventually end up paying more tax on profits from investment trust disposals, the hikes were smaller than some had feared. Plus, they came into effect on budget day, rather than being held over until the first day of the new tax year next April, as tax changes often are.

This is important because many analysts have reported a sell-off of investment trust shares in recent weeks by investors anxious to avoid the expected CGT rise. That sell-off should now stop – partly because the new tax regime is not as punitive as predictions suggested, but also because now the CGT rises are in place, it’s no longer possible to get in front of them.

An associated positive from the CGT hike is that it makes investment trusts focused on income look more attractive. That could provide a boost for high-yielding equity income funds – and the AIC’s [insert link here: Dividend Heroes – which have typically paid out more of their return in income rather than capital gains.

Higher CGT also means more demand for assets where the tax isn’t payable on profits. Venture capital trusts are an obvious example, since they’re exempt from CGT. But all assets held within an individual savings account are also exempt, so investment trusts bought through these shelters will remain attractive. Helpfully, the Budget left the current Isa regime completely untouched.

At a sectoral level, increased government spending should help domestic companies with more exposure to the UK economy. That could include many small and medium-sized companies, so investment trusts specialising in this area of the market stand to benefit. At the very small end, investment trusts with holdings on the Alternative Investment Market (AIM) are already getting a boost from a share price bounce there, reflecting the fact that the Chancellor’s imposition of a tougher inheritance tax regime on AIM shares does not go as far as some had expected.

On the downside, certain sectors of the investment trust industry could face some headwinds. We’ve seen yields on gilts rise in the days since the Budget, with markets anxious about increased government borrowing and the prospect of additional inflation. That’s a potential drag on assets such as infrastructure and real estate – where investment trusts are a sensible way to get exposure. This is because these trusts are priced with reference to gilt yields, which are rising, making yields on infrastructure, property and renewable energy trusts look less attractive.

Another concern is the private equity sector, with the government now demanding more tax from the industry though changes to the carried interest reforms. But market analysts expect the effect here to be minimal since many private equity-focused investment trust hold much of their portfolios in overseas firms and funds where different tax rules apply.

In other words, you win some and you lose some. But the bottom line is that advisers have good reason to consider the investment trust sector for clients. With all the Budget uncertainty now finally out of the way, a sector that still looks very attractively priced, with many trusts’ shares on substantial discounts to the value of their assets, can get on with their day job.