Investment Trusts or Unit Trusts

bigfreddiel

What are the pros/cons on investing in ITs or UTs within the same or similar sector, for example Global Growth and so on - within an ISA of course.

Presuming ITs and UTs do cover similar sectors, do they have similar TERs?

fj

Rollinghome

bigfreddiel wrote: »

What are the pros/cons on investing in ITs or UTs within the same or similar sector, for example Global Growth and so on - within an ISA of course.

Presuming ITs and UTs do cover similar sectors, do they have similar TERs?

The TERs for ITs will (almost) invariably be considerably lower than similar UTs, often around just 0.5% as opposed to 1.5% or more for UT/OEICs.

One reason for that is that most UTs include 0.5% annual “trail commission” payable to an adviser which is charged even when an adviser isn't used.

ITs don’t pay sales commission to advisers (with rare exceptions that should be avoided) which is the reason why most IFAs are reluctant to sell them. Paying trail commission on UTs can be avoided in a very few cases by buying direct, but not many. The effect of compounding means that even small reductions in annual charges has a huge impact on returns over a few years.

There’s also no front end charges/commission payable but you will have the costs of purchasing the shares via a broker and again when selling.

Another reason for the lower costs of ITs is greater efficiency. Whenever the number of unit buyers fails to match the number of sellers, a unit trust manager may need to buy or sell stocks with all the costs involved. In a fast falling market a unit trust manager can become a forced seller to fund redemptions as units are sold and may choose to suspend redemptions altogether for a period. UTs are are priced usually just once a day or sometimes once a week and with 'forward pricing' the buyer or seller won’t know the price in advance

None of that happens with ITs and shares can be bought or sold at any time the markets are open at a price agreed at the time of purchase or sale.

ITs have other advantages. Generally the shares sell at a discount to the net asset value. So if a share is at a discount of 15% you’d get 100p of assets working for you for 85p. That can work the other way if you buy at a narrow discount that widens so generally worth looking for a reasonable discount with not too much scope for widening. (A very few IT stocks sell at a premium to NAV and except in exceptional circumstances are best avoided.) The discount/premium is determined by the market.

ITs have a board of directors answerable to the shareholders and an AGM is held which shareholders can attend and ask questions. The best that UT investors can expect is an occasional review leaflet from the managers and have no say in the running of the management company.

ITs can also borrow as needed which, used wisely, can leverage performance or can move into cash in uncertain markets. As a well as ordinary shares, they can be bought as “splits” which enable shareholder to benefit in different ways from the capital gains and dividends to suit their taxation needs.

It's a bit late but I hope that all makes sense. So although ITs can be more complicated than UTs they need not be and there can be considerable advantages besides the lower costs. More details at the Association of Investment Trust Companies website.

bigfreddiel

Rollinghome wrote: »

The TERs for ITs will (almost) invariably be considerably lower than similar UTs, often around just 0.5% as opposed to 1.5% or more for UT/OEICs.

One reason for that is that most UTs include 0.5% annual “trail commission” payable to an adviser which is charged even when an adviser isn't used.

More details at the Association of Investment Trust Companies website.

Can I just say that has been one of the most informative replies I've seen on MSE, cheers Rollinghome.
re you hold your UTs
Just on another point, the "trail commission" - you can get half of that back by registering your holdings with COMMSHARE (http://www.commshare.com/default.aspx), regardless of where you hold your UTs - mine are with Fidelity and TDW - so you can reduce the TER slightly.

Anyway, I'm probably going down th IT route for some of my portfolio now, looking for a yield of say 4-6% and some growth, ones I may go for are:

Edinburgh Invest Tst


City of London IT PLC

Henderson High Income Trust Ord

Scottish American Investment Co PLC

Cheers

dunstonh

ITs don’t pay sales commission to advisers (with rare exceptions that should be avoided) which is the reason why most IFAs are reluctant to sell them.

The fact that most aren't authorised to recommend them (at the moment) is a reason that you always tend to ignore.

Rollinghome

dunstonh wrote: »

The fact that most aren't authorised to recommend them (at the moment) is a reason that you always tend to ignore.

Yes, it's true that most IFAs are only able to advise on a very limited range of investments which is why the term "Independent Financial Adviser" is so misleading. Most IFAs still advise only products they're paid commission to sell.

So as ITs don't pay commision that's hardly a problem to the majority of IFAs still selling on commission and so wouldn't wish to sell them anyway - as with low cost index tracker funds which also mostly pay no sales commission. Without the lure of commission payments there's been little incentive for most IFAs to seek authorisation.

Genuinely fee-based IFAs who earn their money for giving advice rather than from sales commission paid by the product providers and wish to recommend the best investments regardless of the commission payments available appear able to do so. Perhaps you should consider doing the same as they do?

Personally, I'd steer a wide berth of any adviser with only limited knowlege of investment who didn't understand ITs and/or wasn't able to advise on them.

There seems to be an expectation that when direct commission payments are banned under the RDR in 2013 that we'll see far more IFAs recommending other than the current commission paying investment products including ITs, ETFs and other index-tracker funds. Roll on 2013.

Rollinghome

bigfreddiel wrote: »

Edinburgh Invest Tst

The Edinburgh IT provides a useful comparison. As you’ll know, the manager of that IT, Neil Woodford, is also the manager of the broadly similar Invesco Perp Income unit trust fund.

The TER for the UT is 1.68% but for the IT is just 0.66% (to 1/3/10). Whereas the UT is up 11% this year, the IT is up 30%. Over three years the figures are a loss of 1% for the UT fund but a gain of 18% for the IT. What should be taken into account is that some of that outperformance is due to a move from a discount to a premium since Woodford took over in Sept 2008 – currently at +0.7%. Obviously there’s now only limited headroom for a further increase of that premium.

Good point on rebates from discount brokers. Chartwell Direct, Clubfinance and Hargreaves Lansdown also rebate a portion of the AMC. Cavendish Online and Alliance refund some or all but charge a small fee. I’ve only experience of H-L. Has your experience of Commshare been good?

dunstonh

Personally, I'd steer a wide berth of any adviser with only limited knowlege of investment who didn't understand ITs and/or wasn't able to advise on them.

Thats just silly as the qualification requirements cover the different types. Its just the FSA permissions (until recently) that prevented it as well as some compliance standards.

Genuinely fee-based IFAs who earn their money for giving advice rather than from sales commission paid by the product providers and wish to recommend the best investments regardless of the commission payments available appear able to do so. Perhaps you should consider doing the same as they do? Without the lure of commission payments there's been little incentive for most IFAs to seek authorisation.

perhaps you should consider getting your facts right first before making such statements.

There seems to be an expectation that when direct commission payments are banned under the RDR in 2013 that we'll see far more IFAs recommending other than the current commission paying investment products including ITs, ETFs and other index-tracker funds. Roll on 2013.

The fact that the FSA is opening up other types of investments for IFAs to use as well may have something to do with it. i.e. if you cant use it currently but you can after 2012 then figures are going to increase by default.

jimjames

Thanks rollinghome, I think that was a really useful explanation of IT vs UT and the benefits of Investment trusts in particular.

Personally I think investment trusts are one of the hidden gems of the investment industry. To be able to access some first class managers and diverse ranges of investments for very low sums of money (from £25) with very low charges (from 0.5% stamp duty, no minimum) where you can start, stop and vary payments whenever you want is one of the most flexible investments available and should be accessible to far more people. You only have to see some of the 15 year tax free bonds that have been mentioned here previously to see how bad some other investments are in comparison. If more IFAs are able to recommend them to suitable clients I think that can only be a good thing.

Rollinghome

dunstonh wrote: »

Thats just silly...

Dunston, this is a thread comparing ITs with UTs.

Clearly the very basic qualifications IFAs require, recently referred to by a minister and again by an FSA spokeswomen as comparable to those held by a McDonald's shift manager, are inadequate. See http://www.ftadviser.com/FTAdviser/Regulation/Regulators/Treasury/News/article/20101021/09d43264-dcff-11df-b6fc-00144f2af8e8/IFAs-find-Hobans-McDonalds-comments-insulting.jsp

You proved your total ignorance of ITs when you claimed to someone that a large very well-known IT was 'just a FTSE tracker' when in reality it was a global growth IT with an international p/f.

Instead of being abusive and turning it into into another flag-waving job for your trade, if you went off and learned something about investments that don't bribe you with sales commissions you could then make a useful contribution to the thread. Until you learn something about investments such as ITs the value of your advice will be limited.

If you have nothing of value to contribute why not just toddle off elsewhere or pull a cracker with someone?

opinions4u

recently referred to by a minister and again by an FSA spokeswomen as comparable to those held by a McDonald's shift manager, are inadequate

What qualifications do you need to be a government minster? Or an FSA spokeswoman?

I'd hazard a guess that the qualification McDonald's shift managers require (post appointment, internal) has more value.

Rollinghome

opinions4u wrote: »

What qualifications do you need to be a government minster? Or an FSA spokeswoman?

I'd hazard a guess that the qualification McDonald's shift manager's require (post appointment, internal) has more value.

Yawn... You'll need to investigate that for yourself though I understand that that particular minister is a chartered accountant. You'll notice that an IFA made a similar, perhaps you'd agree, slightly puerile defence in that article.

IFAs have fought hard to prevent the new requirements of the RDR being implemented and had pinned their hopes on a change of government. The point the minister and the FSA official were making was that they totally agreed with the last government that the qualifications for IFAs are currently far too low and needed to be raised. With their last hope gone, many IFAs are expected to leave the industry for other sales jobs.

And while your assessment of the value of the qualifications for McDonald's employees is of course much appreciated can I remind you this thread is about a comparison of ITs and UTs so your knowledge on that subject would be even more appeciated.