With the ups and downs of the stock market in 2022, many investors are looking to diversify into more stable assets. Trust investing has become an increasingly popular option, providing steady returns and downside protection. However, not all trusts are created equal. When selecting the best trust for your investment goals in 2022, there are several key factors to consider.
Understand the different types of trusts
The most common trusts for investing include real estate investment trusts (REITs), business development companies (BDCs), closed-end funds (CEFs), and master limited partnerships (MLPs). Each has distinct characteristics catering to different investment objectives. For example, REITs own income-producing real estate and pay out high dividends from rents. BDCs provide financing to private companies and trade like stocks. CEFs invest in diversified assets but trade at market prices like ETFs. MLPs own energy infrastructure and benefit from cash flows of pipelines and storage assets.
Evaluate management track records
When researching trusts, look at the experience and performance of the management team. Strong managers can consistently generate returns through different market environments. For REITs, assess the manager’s real estate experience and ability to source deals and manage properties. For BDCs and CEFs, examine the manager’s investing process and risk management. Top-tier managers with proven long-term records are key for successful trust investing.
Analyze financial metrics and valuation
Trusts should be evaluated on key financial metrics like FFO for REITs, NAV discounts for CEFs, and dividend coverage for BDCs. Comparing these ratios to peers can identify relatively undervalued trusts. Also assess portfolio holdings – REIT property types, BDC industry exposures, CEF asset classes. Try to find trusts trading at discounts to fair value with diversified portfolios poised to perform well in current market conditions.
Match distribution characteristics
Trust distributions can provide steady income or growth. REITs and MLPs offer high yields from contractual rents and pipeline assets. BDCs and CEFs pay fluctuating dividends based on underlying holdings. Growth-oriented trusts reinvest cash flows to expand assets. Determine which distribution profile aligns with your investment goals. Retirees may want higher current income while younger investors can opt for more capital appreciation.
Diversify across sectors and strategies
Constructing a diversified trust portfolio can balance risk and return. Combining different types of trusts provides exposure to various asset classes. Investing in multiple sectors smooths industry-specific volatility. Complementing high-yield REITs with a growth-focused BDC offers both income and upside potential. Diversification allows participating in trusts while avoiding concentration in any single strategy or manager.
With thoughtful analysis of trust characteristics, financials, valuations, distributions, and diversification, investors can identify the best trusts to meet their specific investment goals in 2022. Taking a strategic approach to trust investing can provide stable income, growth, and downside resilience even in volatile markets.