Unit or Investment Trusts?

prunus

Hi,

I have about 90K lying in a bank account (because I've gathered it in). I have some ISA money in UT's bought via Best Invest and/or CoFunds, a relationship I'm not clear on. So I started looking at ITs which can be bought directly via a cheap stockbroker.

Investment Trusts are having a good press lately. However, they can be a bit confusing. For example, Edinburgh IT has performance charges and an annual commission take. There's stamp duty to pay, and the brokers trading charge.

That Investment Trust is run by Neil Woodford who also runs Invesco Perpetual Income Unit Trust. I can buy the unit trust via BestInvest for a nil initial charge which seems to make it a no-brainer.

But there could be charges in the Unit Trust I'm not aware of which makes it hard to assess whether this is likely to be a better buy than the IT, over the normal 5 year investment viewpoint.

I'd really value some advice here. Can somebody help, please?

Reaper

As you have found investment trusts do often have a mixture of charges which makes it hard to understand how much you will pay. The best way is to look for figures for the effect all the combined charges have.

So if you look at this PDF on page 16 it tells you exactly how much the charges will be on a 5 year lump sum investment. Basicaly the effect would be to reduce a 6% annual growth to 5.27%. Or for your £90k it would total £4140 deducted in total over the 5 years.

Sadly I can't find the effect of deductions for the Unit Trust but the next best thing is the Total Expense Ratio (TER) from here which for the Invesco Perpetual High Income Fund is 1.69%.

So on the face of it the Unit Trust is far more expensive, though note the Investment Trust suffers from a performance fee (yuk) which might alter the figures depending how it performs

Performance Related Fee: 15% of the amount of the above-target outperformance,
up to a maximum of 1% of net assets in any one year, should the net asset value (with debt at par) out-perform the FTSE All-Share Index (Total Return) by 1.25% per annum on a three year rolling basis.

Cautious_Investor_3

Hi

Surely when comparing any fund, or indeed types of investment e.g. unit trust v investment trust the conversation should not just come down to charges but overall return i.e. top line return less charges.

Clearly charges are important, after all the less that is taken, the better the theoretical return (although a HSBC tracker at a TER 0f 0.33% would have returned less than Neil Woodford's High Income fund with a TER of circa 1.70% over the past 10 years). There is also some research I have seen which indicates that lower charges are correlated with better performance.

However it must come down to net return after charges and not charges alone.

Think of it like a business, if the directors of a business just focused on expenses and costs and not on turnover they wouldn't have much of a business. They need to focus on both at the same time.

That;s my two peneth anyway, I'll stop teaching you all to suck eggs now :rotfl:

The Cautious Investor

Reaper

You are of course correct that charges are less important than performance.

In this case the OP is comparing 2 funds run by the same manager whose objectives are similar (i.e. mainly UK investment aiming for both income and growth) but even so there will be differences in performance. I haven't looked at the past performance graphs but it should be simple enough to do on Trustnet or similar.

blinko

i would personally go for unit trusts, far more selection, although IT's are technically geared due to the underlying NAV increaseing in bull and decreasing in bear markets

but overall the tend to produce better returns over the period but personally I would mix them up

you get some great unit trusts eg JP Mmorgan natural resources, gold and general, fidelity special situations

prunus

You are all quite right, of course. It's the total return that matters. I just gave the two Neil Woodford trusts as examples that things may not always be as they seem. Thank you Reaper for doing what you could on the statistics.

I don't quiite know where to put the money at the moment. It has occurred to me that, as I think it's possible to find out into which shares the Trusts have put their investors money, to just invest directly into those shares myself.

This would only apply to UK shares of course

I appreciate your replies.

purch

Interesting, but it appears that since Woodford took over 2 years ago the NAV of the trust has performed poorly compared to the price of the trust.

Clearly the name of the manager of the fund matters more than the performance of actual investments held.

Note that it sells at a 1% premium to NAV currently.

Jake'sGran

I never fail to be amazed by the knowledge
of many of the regular posters on here.
I have no idea how much the charges have been on the two ITs I hold.

An Investment trust I bought last year when it was launched is doing well. It is Fidelity China SS which has gained almost 25% already. The only other one I have is Perpetual Income and Growth bought quite some time ago. I paid £7600 and is now at £18922. In both cases HL was the broker.

mike88

The problem with Investment Trusts is that there are two movements affecting price - the value of the underlying assets and the extent to which the price moves at a premium or discount to net asset value. For this reason investment trusts tend to be more volatile and less predictable.

Some of the popular investment trusts are sold at a premium to net asset value which in theory at least means you are paying more for the trust than the assets are worth. Conversely, and more commonly, trusts are sold at a discount to net asset value.

Where there are investment trusts and unit trusts operated with the same objectives by the same manager then its useful to investigate the investment trust discount or premium to net asset value. Theretically, it could be argued that if the investment trust is at a premium then you should buy the unit trust.

At this point you might wish to give up as I did and buy unit trusts. I made this decision many years ago and its possible things might have changed in the last 15 years but the above is my understanding and could be out of date.

Reaper

Too true. Historically for no good reason anybody has been able to come up with Investment Trusts tend to trade at a discount. In other words if you liquidated them today and handed out their total assets (known as NAV) to the investors they would get back more than their shares were worth.

The discount fluctuates over time depending on the popularity of the IT, and can even become a premium (ie the share price goes higher than the total value of their assets).

Because it does fluctuate over time I am wary of ones that are trading at a premium because that could easy vanish if sentiment turns. Jake's Gran is in Fidelity China which is trading at a huge premium. A good chunk of that apparent growth is actually the premium growing rather than real growth in the underlying investments.

The other thing is unlike Unit Trusts the Investment Trusts are allowed to borrow to buy more investments if they think they have seen an opportunity. Not all do it but for those that do this "leveraging" means volatility is increased. So they go up faster in the good times and down faster in the bad.

purch

In the case of the performance fee for this particular Trust ( and most IT's) the fee is paid on returns not including any leverage.