Yields vs Premiums: Getting to Grips with Green Investment Trusts

by | Dec 24, 2021 | Blog

Hands holding coins with a green tree growing out of them

Summary

  • Investment trusts are companies that have been listed on the stock exchange that sell shares to investors and then pool the money together to make investments on behalf of the shareholders. Many investment trusts have moved into the green market due to the increasing pressure for businesses to do their part for the environment.
  • Some investment trusts aim to target global companies that show the most significant growth value potential, while others are more niche, focusing on green, sustainable and ethical initiatives. These are the trusts green investors should seek.
  • Establish the green investment goals and consider the best sector to invest in. Once the criteria have been narrowed down, a shortlist of potential green investment trusts can be considered. Additional costs should also be considered, such as broker fees and annual trust maintenance charges.
  • Green investment trusts can be bought directly from the trust (if recently launched) or on the secondary market if someone is willing to sell. Whatever the route, the investor will need to find a broker or an online investment platform to act as the broker.

Introduction

There can be a draw to investment trusts for the traditional investor—some of the oldest trusts were founded in Britain during the 19th Century to raise funds for global projects. A few of these investment trusts have been paying and increasing dividends for decades.

Investment trusts have been moving into the green market due to the mounting pressure for companies to do their part to support environmental concerns. It is almost impossible for even the most conservative companies to hide behind their historical status. They now need to step up and support green initiatives.

For those new to investment, getting started can be a little daunting at first, but confidence can soon be built with a  bit of research into the basics. This article aims to introduce green investment trusts and some of the fundamentals needed to make informed investment decisions.

What Is a Green Investment Trust?

Investment trusts are companies that have been listed on the stock exchange that sell shares to investors and then pool the money together to select investments in bonds, shares, property and other assets on behalf of the shareholders.

Illustration of investors setting share prices on a profitability chart

Investment trusts are companies that have been listed on the stock exchange that sell shares to investors and then pool the money together to select investments in bonds, shares, property and other assets on behalf of the shareholders. Investment trusts are managed by an independent board of directors elected to represent the shareholders’ interests.

The directors’ job is to determine policies and appoint a fund manager from an asset management firm to select the best investments and ensure that shareholders are getting value for money.

Like other collective investments, each trust has a specific mandate or objective. Consequently, the trusts tend to be categorized by sector. This is done by the industry’s trade body, known as the Association of Investment Companies (AIC). The AIC categorizes the trusts based on the region, industry, or type of investment pursued.

Some investment trusts have a broad remit and target global companies with the most significant growth value potential. Then others are more niche with a focused remit, such as green, sustainable, and ethical initiatives. These are the types of investment trusts a green investor should look out for.

The key features of investment trusts include:

  • Fixed supply of shares

There are a set number of shares available which means they can only be invested in when the trust is launched or someone wants to sell. This close-ended policy allows the trust managers freedom to carry out their objectives without being compelled to add investments when new money flows in and offload them when investors choose to exit.

  • Freedom to borrow

Some trusts borrow money to purchase larger stakes in investments—known as gearing. Gearing can be both profitable and dangerous as it amplifies gains when an investment performs well but can also accentuate losses when they drop.

  • Power to trade at a discount and a premium

As investment trusts trade on the stock exchange, the share price depends on supply and demand instead of the combined holdings’ actual value— net asset value (NAV).

The investment price can be undervalued or overvalued since share prices are based on what investors feel they are worth (instead of the NAV). If there is no demand, an investment trust can be undervalued and sell for less than its NAV, in other words, trading at a discount. However, when a trust is in high demand, it can be overvalued, and the trade price can soar beyond its NAV, which would be trading at a premium.

  • Regular cash flow for investors

Investment trusts can withhold up to 15% of the income generated from their investments to give back to investors through a dividend payout. They are paid later, in such a situation as when returns are down. It is an unconventional approach that differs from open-ended funds that pay back all income to their investors. Dividend payouts mean investors are more likely to get a stable or steadily increasing income, irrespective of economic activity or company boardroom disagreements.

How to Choose and Invest in Green Investment Trusts

Establish the green investment goals and consider what sector would be best to invest in.

The first step to choosing an investment trust is researching which trust best suits the investor’s green objectives. Establish the green investment goals and consider the best sector to invest in. For example, the solar power industry would be a viable option for an investor looking for a potential long-term reward.

Once the criteria have been narrowed down, a shortlist of potential green investment trusts can be considered. Essential factors to keep in mind include track records, whether the trust is trading at a reasonable price, whether the investor wants to use gearing, and any associated charges.

Aside from broker fees and other external costs, investors pay the trust an ongoing annual charge. The amount is deducted from the investment, stated as a percentage, and covers the trust’s day-to-day running expenses.

It is possible to purchase green investment trusts directly from the trust. To do this, the investor will need to buy from an investment trust which has only recently launched. However, if a trust that has been in action for some time catches an investor’s eye, the trust can be bought via a broker or online investment platform on the secondary market.

To buy a trust on the secondary market, a willing seller needs to be found, which can be surprisingly easy. Then, the investor will need to find a broker or an online investment platform to act as the broker. Of course, there are charges involved with using broker services, including transaction fees, so these should be considered when calculating available investment monies.

The Takeaway

Before investing in any green investment trust, the affordability and risks involved must be calculated. For example, are the associated fees justifiable, and is the trust likely to positively impact the environmental causes that are important to the investor? These are all factors that need to be measured up.

As with any investment, the capital can be at risk depending on the investment choice, and the investor may get back less than initially paid in.

Frequently Asked Questions (FAQs)

Are investment trust shares difficult to sell?

Investment trust shares can be difficult to sell as there is a perception that trusts tend to be traded at a discount. However, boards have been increasingly focused on improving liquidity to help close the discount to benefit shareholders in recent years.

 

Do investment trusts come with a risk of volatility?

Like all investments, trusts can rise and fall in value. However, investment trusts have a larger range of factors that affect their performance (such as supply and demand), making them more volatile and therefore a high-risk investment.

 

What is green investing?

Green investing (otherwise known as eco-investing) is a sort of socially responsible investing where investments are made in businesses that support or provide environmentally friendly products and practices.

 

Why is green financing important?

Green financing is needed to facilitate developing and implementing sustainable business models, investments, and trade for environmental and social projects and policies. It helps support vital industries such as renewable energy and sustainable living.

 

What does yield mean?

Yield is the income return on investment, such as the amount received from a trust. The yield is typically expressed as an annual percentage rate based on the investment’s cost, current market value, or face value.