In this piece we tell you what is worth knowing about investing in Investment Trusts in Ireland. We also share some performance data and results of the most popular Investment Trusts in Ireland.

Investment Trusts have been in vogue for a little while - in no small small part due to the tax treatment of any realised gains. Many investors are hell-bent on finding an option that might allow them to invest in a diversified and low-cost way, and try to invest via Capital Gains Tax regime as opposed to Exit Tax regime. Some believe Investment Trusts in Ireland allow you to do that, but like many things it's not as straight-forward as that!

We discussed the main types of investments and their tax treatment in Blog 157, which might worth checking-out before you read on.

Investment Trusts in Ireland - The Pros & Cons

Ultimately, one shouldn't let the 'tax tail' wag the 'investment dog', so before jumping into Investment Trusts in Ireland let's check if they may or may not be a useful route to take for you.

Pros of Investment Trusts in Ireland:

• The current consensus is that gains you realise from investing in Investment Trusts are taxed under Capital Gains Tax of 33%, as opposed to 41% Exit Tax. Note that as with all CGT gains, you need to actually realise the gain in order to benefit from the potentially lower tax rate versus Exit Tax or other!
• If you do have gains on disposal you can claim to write-off these gains against Capital Losses you may have from past investment losses
• You may benefit from the annual CGT allowance of €1,270, or €2,540 combined if you have a joint investment. In essence, each year you can realise Capital Gains across all your relevant investments of up to €1,270 (single) or €2,540 (joint) each year before you start paying tax on realised gains
• While they are classed as ‘closed ended’ shares, they are listed on the stock exchange, traded daily and therefore you may be able to buy and sell them with very little if any delay
• Some Investment Trusts in Ireland have performed strongly compared to an index approach or retail investment product funds (others less so - see below)
• Depending on the values at the time, when you invest in Investment Trusts you may be buying at a discount (cheaper) or premium (dearer) to the Net Asset Value (NAV). Obviously you stand to benefit if you buy at a discount. You will have a heads-up on this when you are considering buying.
• On a given day this can vary. The same applies however when you sell so it can be both Pro & Con on entry or exit
• The underlying assets can be less diverse and less transparent than an index
• You can invest in niche or specific sectors if you wish via separate ITs

Cons of Investment Trusts in Ireland:

• As they are actively managed shares the fund fee alone tends to be 1%+ (0.2% on an index fund)
• There is a potential illiquidity issue if outflows are higher than inflows, or if you must sell at discount below the NAV
• Being actively managed one has no way of knowing which IT will or won’t potentially outperform the market over a period of time
• I believe Revenue have never actually confirmed the taxation status of ITs and like anything it is subject to change or challenge in future - so be prepared if the sands begin to shift
• If dividends are not reinvested, are paid out to you, you need to report these payments and taxable at your Income Tax + PRSI + USC rates
• If domiciled in UK and an investor dies with a holding above the nil-rate band in UK (£325k currently), it can lead to Inheritance Tax payable in UK, and potential double-taxation in extreme circumstances
• You would need to sell some holdings to actually realise the gain, in order for you or your accountant to utilise against your previous Capital Losses
• UK based equity so FX fees and trading fees apply
• If you need to sell and the Investment Trust is selling at a Discount, you would lose potentially big money. This wouldn't be good because you would be selling at a lower price than the Net Asset Value (NAV)
• Total fees can be c1-4% per year (and can be hard to get a definitive on the fees due to the opacity of some of them)
• If you read some of the disclosures and Key Investor Documents these companies make it very clear that they are not intended for 'retail investors' they are designed for institutional investors
• These same KIDs show total yearly fees of over 3.9% (in fund fees alone), when 'performance fees' are included

It will depend on your view-point, but the final point could be viewed as either a Pro or a Con! I have mentioned MIFID 2 before, and how it was introduced to ensure financial service companies ensured improved protections to investors, in terms of information, capital protection and safety. In 2016 the UK regulator, under some persuasion it seems, ruled that Investment Trusts could avoid having to automatically act in line with the rigors of MIFID 2.

The Performance

I'm aware that most investors focus on is the performance, however the above Pros and Cons cannot be ignored with Investment Trusts in Ireland. A tax, fee or logistical issue from the above Pros and Cons can make any potential performance advantage totally irrelevant - they are that significant. So with that caveat out of the way, on to the main event!

Below is a snap-shot of some research we did recently - looking at 7 of the most popular Investment Trusts today. For comparison I have also included a simple yet effective Global Equity portfolio of passive index funds.

We included a significant variation of Investment Trust companies in the mix here; Property, Environmental, Wind Energy, Infrastructure and Multi-asset. All domiciled in the UK. Importantly, these are not endorsements or recommendations of any sort - they are purely the main ones that appear to be getting attention in recent times, mentioned on line and spoken about by advisors.

While performance has been strong for some and awful from others - it shows again that when it comes to active management, there is no knowing who will continue to beat the market and who won't! Read our recent Blog 153 where we shared the fact that the majority of active funds do not beat the market over any consistent period of time!

No surprises that the top performing company here was the one with a heavy tilt to US Tech companies.

What was a little more surprising is that the one fund here that aims to track Global Equity (MSCI) would be expected to deliver broadly similar returns as the blended passive portfolio I have included in the comparison, actually under-performed that passive portfolio by over 40% over the 7 years! Madness.

Conclusion

There are two really clear conclusions to take from this, in my view at least:

• Number 1: Don't let the tax-tail wag the investment dog
• Number 2: Don't let the tax-tail wag the investment dog

That is all!

Hope you found it useful.

Paddy Delaney QFA RPA APA

Please read Disclaimer on all of this. This is not advice nor recommendation - don't be silly with your hard-earned!