155000 to invest

jamesd

dave4343 wrote: »

His age is 64, yearly pension of 25k, plus state pension, mortgage free, not looking for a great deal in return, he is a safe type of character, not sure if he would like the risk of shares.

One easy and safe option for both of them is deferring the state pensions. You can do that once even if you've started to take them. The income increases by 10.4% for each year you do this, pro-rated for shorter times. For men in good health the optimal deferral period is 1-3 years, lower end if a manual worker, higher end if a desk or professional worker or of a background with long life expectancy. For a woman it's in the 2-5 year range. It's a particularly good way to provide a higher income for a woman whose spouse is more likely to die first.

Assuming his income is a work defined benefit scheme he'll be eligible for Flexible Drawdown, where he can take out all of a pension pot or as much as he likes at once, with the first 25% tax free, the rest charged as normal taxable income. So he can do nicely by making pension contributions to a personal pension to get the tax relief, then taking the money out after some years, whenever he might need the capital. Until then he can regularly take the 25% tax free and use Capped Income Drawdown to take an income. Limited to 3600 gross a year if not now working.

Investment trusts and OIECs have similar charges, in the 0.5 to 0.75% range. What differs in charging is that the OEICs also bundle into the annual management charge about 0.25-0.3% that is paid to the platform on which you hold them, for which you also often get buying and selling at no extra cost included, and 0.5% that would have gone to an IFA under the old IFA charging model but is now normally not charged at all or refunded. For this reason the changes are causing many OEIC providers to introduce so-called "clean" versions with an annual management charge often of 0.75% that no longer includes those extra payments. An investment trust doesn't not have to pay those costs, they have just been paid separately, in the same way as OEICs will now do in the future as the changes for them take effect. Both OEICs (formerly called unit trusts, with some smallish differences, but same concept) also have their own additional expenses in addition, like their costs for buying and selling shares, legal fees and such. Some people will bundle all of those expenses together for OEICs to try to make them look bad but won't explain that the same costs exist for whatever else they are pitching instead.

OEICs prices and performance are reported after deducting those charges paid to platforms and IFAs, or rebated often now, investment trusts are reported not including them, giving the investment trusts an advantage in apparent performance because their reporting doesn't include other costs you have to pay; this reflects the different target markets where some are more used to bundled pricing and others not. The changes to IFA and platform charging will eliminate this difference and that will effectively increase reported managed OEIC returns by about 0.75% a year compared to the past. The other costs don't go away, they will just be handled similarly to the way investment trust extra costs have always been handled. Fans of investment trusts will often have pointed to better performance without bothering to explain that the OEIC performance includes the costs of things not included in the investment trust performance that you still have to pay for.

Good investment trusts can outperform their OIEC equivalent, in part because they use borrowing, leverage, and in part because they are marketed more to more experienced investors and often deliberately take higher risks because they know that experienced investors are better able to understand and deal with that. The combination of leverage and deliberate actions tends to make them higher risk than comparable OEICs but this doesn't have to be true and some are of quite modest risk levels. Same for OEIC risk levels, it's not the fact of being an OEIC that causes lower risk but the investments made and you can have high or low risk OEICs as well. OEICs have to be priced based on today's value of the investments they hold and are also required to distribute all of their returns, they can't hold anything back. Investment trusts are not valued based on today's value of the investments have, they are traded like companies and normally at a price higher or lower than the value of their investments depending on the market view of them. Investments trusts can and typically do hold back some of their profits, particularly those aimed at giving income, so that they can do things like saying that they have increased dividends every year for x years. It's just a bit of sleight of hand, paying out some of the saved capital or internal income capital as income. With an OEIC you'd have got that when it happened, not when it decides it wants to pay it to you.

The way OEICs and investment trusts respond to market drops also differs. The OEIC has to every day report its true mark to market price and buys and sells at those exact prices (plus some dealing costs, usually not significant). An investment trust in the same situation sees a dropping net asset value (NAV) and an increasing discount. Same market movement, usually amplified or a geared ET, and same opportunity to increase your investment returns by buying an investment at a time when other people don't want to. Market sentiment also affects ITs and OEICs on the up side. For an IT the discount will become negative, a higher price to buy than the NAV. A unit trust will still price according to the exact market value of what it holds, without that premium. This increases the potential benefit of good market timing with ITs compared to OEICs, and increases the penalties for getting it wrong.

Don't avoid or use OEICs or investment trusts based on such things, use whichever is best for the task. In dropping markets the leverage tends to be bad, in rising, good. Investment trusts tend to be particularly good for commercial property because they don't have to sell it, while a unit trust may be forced to block sales of units to give time to sell a building. Instead, an investment trust's share price will fall, so you'll sell at more of a loss but actually be able to sell more quickly. Which of those two cases is best depends on what your objectives are - want less money now or more money after a forced delay?

dunstonh

Certainly my understanding of ITs is that they have lower fees and outperform UTs (perhaps because of the lower fees)

Clean priced OEICs are typically the same or cheaper than ITs. Historically, retail OEICs with bundled pricing did cost more because of that bundling. In an unbundled world, that is no longer the case.

Gearing, discounting and different investment remit are the key differences.

grey_gym_sock

discounting cuts both ways.

for illiquid assets (e.g. property), i'd say it's riskier to be in an open-ended fund, where sales of units may be suspended, than in a closed-ended fund, where the discount may widen. in both cases you have the option of waiting for prices to recover; but only in 1 case is there always a market price if you do want to sell.

for very liquid assets, a closed-ended fund is more risky, because the price is more volatile due to the discount fluctuating. however, this is less of an issue if you are a longer-term holder, and preferably if you buy in at what appears to be a relatively large discount.

there is also a cost/return bonus if you buy into a closed-ended fund which pays a dividend at a discount. e.g. if you buy an IT which is paying a dividend of 4% of its net assets, at a 10% discount, then you get a dividend of c. 4.4% of the price you paid. that is 0.4% higher return, or lower costs, per year, for as long as you hold the IT (if it continues to pay the dividend). though it won't be sufficient compensation if the discount widens to 20% when you sell, unless you've held the IT for more than c. 25 years ...

doubleJackD

jem16 wrote: »

I found the evidence fairly widespread.

http://www.candidmoney.com/investment/investmenttrusts.aspx

"tend to make investment trusts riskier". i certainly don't think that means that every Unit Trust is safer than every Investment Trust.

I honestly don't think anyone can say that ITs are/ were too risky for the average investor. Perhaps ITs were not recommended because they pay no sales commission....

the document provided by Jem16 says

"Charges are usually lower because investment trusts don't pay commission to financial advisers."

"Investment trusts don't normally pay sales commissions, making them unpopular with commission based financial advisers."

jem16

doubleJackD wrote: »

"tend to make investment trusts riskier". i certainly don't think that means that every Unit Trust is safer than every Investment Trust.

Please don't selectively quote me. I said;

These factors tend to make investment trusts riskier than an equivalent unit trust, although returns could be greater

Note the bold part.

In the same way we could say, "Smokers tend to have an increased risk of contracting lung diseases than non smokers."

Are you suggesting that smoking is better for you than not not smoking just because the word "tend" is used?

"Investment trusts don't normally pay sales commissions, making them unpopular with commission based financial advisers."

What about fee based IFAs?

doubleJackD

jem16 wrote: »

Please don't selectively quote me. I said;



Note the bold part.

In the same way we could say, "Smokers tend to have an increased risk of contracting lung diseases than non smokers."

Are you suggesting that smoking is better for you than not not smoking just because the word "tend" is used?



What about fee based IFAs?

with respect a website written by an IFA is hardly strong evidence that ITs are riskier than UTs..... And words like "tend" are fairly wishy washy..... It's like saying people from Glasgow have a tendency to live in a tower block and be unemployed....

I'm honestly curious as to whether ITs or UTs are riskier. My personal opinion is that UTs are riskier because of the higher fees and forced selling.... I only recently found out UTs could borrow as well.....

http://www.trustnet.com/Education/UT.aspx?ms=2

What does seem clear is that ITs deliver better returns than the equivalent UT...... the below is from a quality broadsheet.... and the message made is fairly clear.......

"Even though investment trusts are less popular than unit trusts, the average investment trust has outperformed the average unit trust in every sector except one – Japan – over the past 10 years."

http://www.telegraph.co.uk/finance/personalfinance/investing/8767542/Citys-best-kept-secrets-beat-unit-trusts-hands-down.html

oldvicar

doubleJackD wrote: »

with respect a website written by an IFA is hardly strong evidence

I'll be interested to see how this spat between you and jem16 turns out.

With respect, you started it by saying you could find little evidence.

Jem countered that there was widespread evidence (without commenting on the quality).

Now you're miffed because you wanted strong evidence.


The English language is a wonderful thing, used correctly. I don't suppose one of you is an American, are you?

gadgetmind

What's impressive is that someone found enough UTs that have been around for ten years to do that study!

However, let's just say that given the choice between candidmoney and the telegraph I would *just* given the benefit of the doubt to the former.

doubleJackD

oldvicar wrote: »

I'll be interested to see how this spat between you and jem16 turns out.

With respect, you started it by saying you could find little evidence.

Jem countered that there was widespread evidence (without commenting on the quality).

Now you're miffed because you wanted strong evidence.


The English language is a wonderful thing, used correctly. I don't suppose one of you is an American, are you?

to be fair it wasn't me that described ITs being riskier as "factual". I do think when someone describes something as "factual" they should have some strong evidence to back it up.

I congratulate Jem on finding some evidence (though perhaps not the best)

doubleJackD

gadgetmind wrote: »

What's impressive is that someone found enough UTs that have been around for ten years to do that study!

you suspect poorly performing UTs are quietly done away with...