After years in the doldrums, investment trusts - those venerable pooled funds with names like Foreign and Colonial and
For decades, City folk have favoured investment trusts over unit trusts and openended funds. Independent financial advisers ignored them, however, since they did not pay any commission. That, and the fact that unit trusts are easier to explain, has meant that the open-ended sector has dominated. Now, thanks to the Retail Distribution Review, the playing field has been levelled. From April, funds will not be allowed to pay commission to IFAs. So it is no longer in advisers' and brokers' interests to ignore investment trusts. Already retail investors are cottoning on to the advantages, and last year saw a 66 per cent rise in purchases of investment trusts through fund supermarkets.
Because investment trusts don't pour money into marketing, they have been able to keep their charges under control. (The menace of performance fees is creeping in, but that is a discussion for another time. ) Many, after all, were set up for canny Scotsmen.
Not only are investment trusts cheaper on the whole, but they also perform better than unit trusts.
But if you're interested in finding bargains in this sector, it is vital to arm yourself with knowledge. All the data you need is freely available online. If you already own shares in a trust, you can go to the AGM and ask the managers questions - something you cannot do with unit trusts. Investment trusts also have an independent board of directors, who can fire a poorly performing management team and replace them. The directors also keep an eye on the level of borrowing (or 'gearing'): trusts can borrow to enhance returns in rising markets; on the other hand, losses can be magnified if markets plummet.
It is a good idea to understand the slightly trickier structure of investment trusts, as opposed to open-ended funds. Basically, the 'closed-end' structure means that the company is divided into a set number of shares and the manager starts with a fixed sum of money. That frees him to invest in illiquid, long-term projects - infrastructure, say - without worrying about having to flog off the assets in a hurry if investors panic and demand their money. (Unit trusts, in contrast, can be forced to sell their holdings at rock-bottom prices to meet redemptions in a market crash - which is a distraction for the manager, to put it mildly. ) This also means that by putting your money in investment trusts you can support useful undertakings, such as building railways or developing cures for deadly diseases.
The investment trust universe attracts some of the brightest managers and they often stay put: it's not uncommon to see a trust in the hands of the same manager for ten years or more. Many risk their own money in their ventures. It's reassuring for investors to know that 'le patron mange ici'.
The closed-end structure does come with specific risks. If investors lose confidence and lots of them sell, then the share price can fall below the value of the underlying holdings, the 'net asset value'. In a plummeting market, this can be worrying. But in some cases, it can present an opportunity to snap up a bargain. If you judge that the discount to NAV is greater than it has been historically - you can find this information online - then you may decide that the trust is going through a temporary bad patch, and the shares are good value. To paraphrase the great
Investment trusts can be moreish. You have to be careful not to 'collect' them, overdiversifying and wastefully churning shares.
Some are actually designed to be one-stop shops, like
I notice that investment trust enthusiasts tend to be obsessive, and fundamentally optimistic. They believe that the market rewards loyalty. I like this. I also like the fact that trusts have retained their distinctive characters, and stayed out of the hands of the marketing men. You have to dig them up for yourself.
All this is interesting. 'Saving' doesn't have to be boring.
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