Investment Trusts or Unit Trusts

jimjames

purch wrote: »

I don't think that is the case with the Fidelity Fund.

I think the way that this offering is structured means that existing shareholdings will not be diluted.

Generally sale of shares at a premium and buying in of shares at a discount will actually improve the NAV for existing shareholders.

Effectively an investment trust buying back its shares is no different to any other company chosing to use its money to buy back its own shares if the board feels it will benefit shareholders.

jimjames

pinkteapot wrote: »

In down-markets you can see a doubly whammy with an IT because (1) the NAV is going down and (2) the discount is widening as the sentiment on that sector/country dips. Therefore your share price can go down by more than the actual market in which the Fund invests (as reflected in the NAV movement).
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Although this is possible potentially an investment trust can be better in a falling illiquid market. Although the share price may drop they do not have to sell assets to fund any redemptions as UT would. In a unit trust the sale for redemptions may affect the remaining holders as performance is then impacted in future by the sale of better assets as generally the most easily disposed would be sold not necessarily the ones that would perform the worst.

Thrugelmir

jimjames wrote: »

Although this is possible potentially an investment trust can be better in a falling illiquid market. Although the share price may drop they do not have to sell assets to fund any redemptions as UT would. In a unit trust the sale for redemptions may affect the remaining holders as performance is then impacted in future by the sale of better assets as generally the most easily disposed would be sold not necessarily the ones that would perform the worst.

Commercial property funds being a classic example. Where unit holders have been barred from selling in the past.

mutley74

Good thread and some info here. Shame the those with handbags have to spoil it.

I have been a UT investor for years, and not really understood ITs, not ever seen many IFAs recommend them incl HL. But looks my porfolio needs some re-assessment. Maybe i will not transfer my ISA to HL and instead transfer to X-o to buy ITs without having to worry about management fees (i.e. HL).

Reaper

I find myself agreeing with points from both sides.

Personally I am a bit of a fan but have made only limited use of them so far for no very good reason.

In the end what matters is the performance. Are they more risky? Do high profile Unit Trusts nick the best managers? To answer these questions I tried to do a UK & Global comparision on Trustnet. Unfortunately I'm not quite comparing like with like. If anybody can find better data that does a decent comparison then I would love to see it. Until then here is what I found for what it's worth, which suggests ITs hold their own against Unit Trusts.

jimjames

Thanks Reaper, thats some very interesting data. I got confused at first glance until I realised that the lines to compare are not the adjacent ones!

Although there are undoubtedly different mandates within the same sectors for a UT and IT, I think the 10 year figures are quite telling.

Global Growth
UT 30.69%
IT 85.46%

UK Growth

UT 42.99%
IT 63.08%

Purely based on these figures it appears that for long term savings an IT can give superior performance. Clearly lower charges have a part in that but does the longer term remit and the ability to buy/hold investments rather than having to keep buying/selling to cope with new investors money as happens in a UT make a difference too? I have a mix of IT and UT and they both have a place but I do feel rather pleased to see these numbers.

cheerfulcat

jimjames wrote: »

Purely based on these figures it appears that for long term savings an IT can give superior performance. Clearly lower charges have a part in that but does the longer term remit and the ability to buy/hold investments rather than having to keep buying/selling to cope with new investors money as happens in a UT make a difference too?

I think that the possibility of gearing has a part to play as well.

Reaper,

Do high profile Unit Trusts nick the best managers?

The Edinburgh IT is managed by Neil Woodford, and Anthony Bolton manages the Fidelity China fund. City Merchants High Yield is managed by Paul Read and Paul Causer, two well-respected fixed income investors.

koru

pinkteapot wrote: »

In down-markets you can see a doubly whammy with an IT because (1) the NAV is going down and (2) the discount is widening as the sentiment on that sector/country dips. Therefore your share price can go down by more than the actual market in which the Fund invests (as reflected in the NAV movement).

On the other hand, you can have more upside than the market during bounces. If you buy an IT when it is trading at a large discount you can potentially do very well off it, if you understand the reasons for the discount and have a view on whether these circumstances will change.

Since ITs can be geared, they can potentially outperform the market on the upside but can underperform by more than UTs on the downside.

All of these are reasons why ITs are riskier than UTs/OEICs (when comparing like-for-like on sectors/countries).

I agree, but it really depends what kind of risk you are talking about. I think you are talking about the risk of fluctuation in the value of your investment. Another reason why investment trusts are riskier in this respect is that they often have borrowings which magnify their gains and losses.

However, if your investment objective is to generate income (for instance to meet your living costs in retirement), you might not necessarily care about the value of your investment as long as the trust maintains or improves the income that it delivers. If so, then there are many investment trusts (such as City of London) that are very low risk, as they have not only maintained but increased the dividend every year for decades. There is no guarantee they will continue to do so, but the track record suggests that it is going to take some sort of absolute catastrophe before your dividend income would fall, given that these trusts have already maintained their record through all the crashes of the last 20, 30 or 40 years. (Not all trusts fit this pattern of course–the Association of Investment Trusts website lists the ones with a good long-term record of steady dividends.)

Of course, if you want guaranteed income you can buy an annuity, but then your capital is gone for good. With an investment trust you can get a similar level of income to an annuity (unless you are very old) and yet retain your capital and have the chance of capital growth, at the price of not having an absolute guarantee of your income.

JSMill

I have over the years read a great deal about Investment Trusts, most of it positive in terms of their charge profiles. I've always had it in my mind to invest in them but have not. When I asked my IFA, he was dismissive. The gist of it was that they somehow open-ended pooled funds now had more to offer. In addition that (for reasons not very too clear to me) ITs were old hat and many of them had closed down or were closing down. Was I told the truth, he whole truth and nothing but the truth? In particular, are they really withering away as he said, and if so is that because of confllict of interest for IFAs in dealing with them or rather something related to their poor performance? Any unclouding appreciated.

Totton

Very good article in the latest 'Investment Trusts' magazine that highlights the sometimes hidden fees of IT's, essentially calls for greater transparency. I guess the same can be said of OEICS.