Investment Trusts - any thoughts?

debtfreelondon

Was looking to start seriously saving and thought about Investment Trusts (wrapped up in an ISA) to take advantage of tax free allowance and get into stocks and shares without paying the extortionate trading fees.

The annual fees seem ok at around 1.5%.

Anyone have any thoughts on them? Any pitfalls to be aware of?

Any advice greatfully received!!

moneyandmountains

debtfreelondon wrote:

Was looking to start seriously saving and thought about Investment Trusts (wrapped up in an ISA) to take advantage of tax free allowance and get into stocks and shares without paying the extortionate trading fees.

The annual fees seem ok at around 1.5%.

Anyone have any thoughts on them? Any pitfalls to be aware of?

Any advice greatfully received!!

Your choice of investments will probably include Open Ended Investment Companies, Unit Trusts and Investment Trusts which are generally funds containing holding in several different shares. The mechanics of how these operate are slightly different. Other options include Property and bond funds.

I would recommend that you read Martin's article on investing in funds and the use of discount brokers. If you decide not to use an IFA, these could save you substantial amounts in comission.

Then a search of the forum for posts by users such as dunstonh and EdInvestor will give you some different views on the best way to invest.

ReportInvestor

Investment trusts are the main means by which I have made my money over the last 3 years.

It was interesting that the leading Child Trust Fund over 1 year was an investment trust.

And the charges are usually much lower than 1.5% dfl mentions - which is exactly why I chose them .

BUT the discount to net asset value has substantially narrowed in the last couple of years, adding to my profits but putting a slight dampener on future prospects (the NAV discount could widen in future. For instance one trust I was in went from a 35% discount to a 6% premium - that's a 41% gain with no change in the value of the underlying investments :eek: but the opposite can happen - and has in the past.

For reference, the experts tell us that investment trusts ought to have around a 6% discount to NAV as a starting point, being the approximate costs of winding up a trust

Investment trusts can also "gear up" ie borrow money to invest in shares.

Put these two facts together and what you get, buy and large, is that if shares do well, investment trusts can do even better.

But also, to some extent, the opposite.

But with low charges, choose the right one and they are a great buy and hold. Ideal for a long term ISA (if you know the risks) or, dare I say it, a SIPP :eek:.

There is also some arbitrage activity in the sector - based around discounts - which can work in your favour.

So you need to know what you are doing, but they can be great.

For the novice, Money Observer regularly does revues of ITs and they have had a very good performance record with their tips over the last 3 years - and they also review performance to help you know when/if to sell.

IFAs don't tend to recommend Investment Trusts because most don't pay commission.

dunstonh

IFAs don't tend to recommend Investment Trusts because most don't pay commission.

This has been posted a few times here but its more a case that whilst investment trusts can be recommended, individual holdings cannot. That falls outside the scope of permissions of many IFAs. So, an IFA would say "I recommend an investment trust", the client would say "which one(s)?" and the IFA would say "can't tell you as I am not authorised to recommend them". So, unit trust/OEIC and SIVAC funds tend to be recommended in their place. There are also good reasons to use OEICs and SIVACs in their place.

Below is a copy and paste of part of my Investment Trusts text I use on my investment reports when ruling out Investment trusts. Much of it is a summary of information from a number of independent reports. It is cropped to show only the reasons why you wouldnt do one and is not the full text I use. I hope it helps in balancing information:


Investment trusts, more than most investment types, have had a difficult time over the past six years. Features that worked to the advantage of closed-ended funds in rising markets have had the reverse effect in volatile markets. A prolonged period of poor equity returns was accompanied by a significant increase in investment discount to net asset value that exacerbated negative portfolio returns. A special feature of investment trusts is their ability to ’gear up’ by borrowing funds at competitive rates to achieve the potential for a higher rate of return. Gearing is a double-edged sword and it becomes a serious impediment if returns are lower than the cost of borrowing. Another unique feature was the ability of certain investment trusts to split shareholders into different groups giving each group defined but different entitlements to the returns from a common portfolio. Unfortunately falling markets revealed that certain zero-dividend preference shares were not as safe as the marketing literature suggested. It also brought to light a ’magic circle’ of mutually invested funds. Compensation issues have not been resolved and the episode has dented the image of investment trusts.

Some believe that investment trusts are increasingly an anachronism whose reason for existence is passing. They are eclipsed by open-ended investment schemes on the one hand and by hedge funds on the other. OEICs offer retail investors more transparency, additional controls and are without the uncertainty of a varying discount to net asset value. Investment trusts position as high risk-reward vehicles for institutional or sophisticated investors has been increasingly replaced by hedge funds that have far greater investment freedom and little of the regulatory burden imposed on onshore closed-ended funds. Despite these problems, the sector is still very much alive.

ReportInvestor

I might continue to hold, or even add, knowing that IFA lack of interest could help to maintain value in the sector.

Seriously, a good post by dh :T , which highlights the potential negative factors of this sector - some of which I hope I mentioned too.

ITs are not for the faint-hearted.

So stay away, you lot. It's much too risky for you and it's mine, all mine . (Not to mention Deemy's.)