Investment trusts versus Mutual funds again

Voyager2002

Thank you, everyone who responded to my earlier thread.

I use a platform that makes no charges for transactions involving UTs/Mutual Funds, but there is a fee for buying securities (including Investment Trust shares) and then another fee for selling them. When you add to this the bid/offer spread, it does seem that the IT investment route would be an expensive one. Should I be trying to decide whether factors like the higher gearing of ITs, and the possibility that a discount when I buy might turn into a premium when I sell are enough to justify the higher cost? Or am I missing something?

dunstonh

Should I be trying to decide whether factors like the higher gearing of ITs, and the possibility that a discount when I buy might turn into a premium when I sell are enough to justify the higher cost? Or am I missing something?

effectively you need to decide if the higher cost is worth it for the extra potential you think may or may not occur. If yes, you buy them. if no, you dont. This goes for any investment charges on any investment type.

gadgetmind

Investment Trusts will tend to favour a long term buy and hold strategy and will also be better suited for buying in larger chunks than you might with a UT.

Some ITs have their own savings schemes, which allow for buying smaller amounts and often without fees or spread.

jimjames

You also need to factor in the generally lower annual management costs of the IT vs mutual fund. However with the latest platforms offering 100% rebate of the commission on funds the difference is fairly small and in some cases now favours the mutual fund. 1.5% AMC with 0.5% commission rebate will beat most IT AMC charges.

mr_fishbulb

You also have to look at the dealing costs from your broker.

~£10 each time you buy and sell an IT could make an impact depending on your total holding.

dunstonh

in some cases now favours the mutual fund. 1.5% AMC with 0.5% commission rebate will beat most IT AMC charges.

And if you use an unbundled platform, the platform commission is rebated as well which could see drops of 0.75-0.9% on the AMC. These will be replaced with explicit platform charges but they would apply to ITs as well as OEICs to create the level playing field that is desired.

Rollinghome

Almost 60% of ITs in the Global Growth sector still have TERs, that's the basic AMC plus other costs, below 1% though the waters are muddied a bit because many ITs may have performance fees.

Aside from management and transaction costs you should also consider the effects of the greater flexibility that IT managers have. Being closed end they don't have the problem of managing inward and outward flows nor the buying and selling costs of that. Those costs are born by the investor but aren't included in the published AMC figures. Arguably, being closed end also allows for longer term investment decisions and, additionally, most ITs have the option to leverage their position if appropriate.

In the end though it comes down to performance and whether you think one fund will outperform another regardless of differing costs, advantages, and structure.

Rollinghome

dunstonh wrote: »

These will be replaced with explicit platform charges but they would apply to ITs as well as OEICs to create the level playing field that is desired.

ITs are equities. Has it been said that platforms will be required to make the same charges for equity holdings as for oeics/unit trusts? With MM turns etc. I could see some problems with any attempt to do that.

Even within unit trusts/oeics, the managers will be banned from paying commission to platforms and eventually the same with platform fess but has it been stated yet that the platforms will be specifically required to make exactly the same charges for all investments?

dunstonh

ITs are equities. Has it been said that platforms will be required to make the same charges for equity holdings as for oeics/unit trusts?

Yes. The unbundled ones already do. The whole point is to remove the cost of the platform from the investment type.

Rollinghome

dunstonh wrote: »

Yes. The unbundled ones already do. The whole point is to remove the cost of the platform from the investment type.

Are you sure? Where has the FSA said that? Traditional brokers don't hold shares on a platform as such so why would they now be required to start charging a platform fee?

They also charge fees for buying and selling shares and there are MM turns. It seems unlikely that they will be banned from charging brokerage or be compelled to charge brokerage fees on unit trusts.

What about shares held with certificates? All sounds very unlikely to me.

Similarly, although I haven't bothered to look carefully, I haven't happened across anything saying that the FSA will require identical fees on all uts/oeics.

It's obviously likely that HL etc. will make similar charges on all funds when they stop receiving commission and platform fees but I haven't seen anything that would specifically stop them having different rates. For example, charging one level of fee for a UT that is sold in small volume but another perhaps for a tracker fund sold in high volume and subject to competition from direct sales by the fund manager if they chose to do that.

dunstonh

Are you sure? Where has the FSA said that? Traditional brokers don't hold shares on a platform as such so why would they now be required to start charging a platform fee?

I suggest you read the platform review publications. Also, do not mix up platforms with brokerage services. For many people, they wont require a platform but just need basic brokerage. However, in the bundled days, many platforms priced their brokerage cheap but wont get away with that post platform review.