Investment trusts - pointless?

IrnBruMan

Many unbundled open ended funds have higher charges than the unbundled or pre-RDR charging structure.
Cost might not be investment trusts advantage over open ended funds going forward but they have many others.
They can borrow at crazy low rates, I know some who borrow at 2%. Any half decent manager can generate a god return from that, and they are.
Their performance is much better than open ended funds as many studies have shown.
They attract and retain talented managers, why? Because as several managers have told me it is much easier to successfully manage money in closed ended funds. If investors want to sell or invest in the fund the manager doesn't have to buy or sell investments to meet this.
I write about investment trust at WhichInvestmentTrust.com but only because I recognise they make more money than open ended funds on average.
Having said that there are open ended funds I love too such as Fundsmith, Liontrust and more.
Lastly, for long term investors, discounts and premiums tend to unwind over time. I am writing an article Herald investment trust right now, it’s on a 20% discount but has still made a 500% plus return for its investors.

jimjames

benalder284 wrote: »

There has certainly been more cases in recent months of IT Boards ditching or switching investment managers which would support the idea that IT shareholders interests are given more attention that in OEICS/UTs - can't recall any poorly performing UT managers voting to move the mandate to another firm

They can't , that is the real difference.

The UT managers are actually employees of the UT company. The IT board contracts the management to an investment manager and is free to move that mandate should they choose.

I guess the UT could fire the manager but that could then be an employment tribunal issue.

bowlhead99

IrnBruMan wrote: »

Cost might not be investment trusts advantage over open ended funds going forward but they have many others.
They can borrow at crazy low rates, I know some who borrow at 2%. Any half decent manager can generate a god return from that, and they are.
Their performance is much better than open ended funds as many studies have shown.

I write about investment trust at WhichInvestmentTrust.com but only because I recognise they make more money than open ended funds on average.

Well, not to suggest there might be a hint of bias in your commentary, in favour of ITs
I too work in the closed ended fund sector (private funds) and agree that a fixed pool of capital can be easier to invest and is pretty much the only way to go in some sectors (as grey gym sock and jimjames have said) - private equity, infrastructure, real estate is very difficult to work if people want to drip money in and out.

However, I would be interested to see whether the performance being "much better than open ended funds as many studies have shown" is really going to bear out - once you have adjusted the returns for the reduced cost advantage which you acknowledge is the case going forward, and when you have properly adjusted for risk.Clearly investing in single equities is riskier and potentially more rewarding than a basket of equities which is in turn more rewarding than a basket of bonds whih in turn is riskier than cash. If you are positioned higher on the risk scale a higher return is needed but does not necessarily mean that the delivery of that return is a higher 'performance'.

Looking at the number of ITs out there vs the number of traditional funds, the trust world includes a relatively larger proportion of higher risk single sector or theme-focussed trusts, or trusts that employ gearing, versus a 'plain vanilla' fund. These risk factors can help the basket of ITs outperform the basket of open ended funds in a rising market or over, say, a cherry picked time period that has favoured particular sectors.

So when an investment trust writer for an investment trust website tells me that he has spoken to investment trust managers who say they are successful at their job and better than their open ended rivals, and that many studies say that the performance is much better, I would view the whole post with professional scepticism. Your post comes over as evangelism.

This said, I hold a good chunk of investment trusts in my portfolio and have nothing against them. I can see why people want IFAs to promote them alongside regular funds but regulated advice is about matching risk and as Dunstonh suggests, relatively fewer people understand discounts and premiums and need the extra risk of gearing or sector focus - even if these concepts are simple or desirable to finance professionals or anyone who has the time and mental capacity to learn and research.

I am writing an article Herald investment trust right now, it’s on a 20% discount but has still made a 500% plus return for its investors.

The return to its investors very much depends on when those investors invested.

Focusing on smaller companies in the technology/ communications / multimedia space can be very lucrative over time because if you stand back and look at what progresses society, developments in those areas are the main areas where developed economies can find growth and productivity improvement.

Clearly anything with high returns has higher risk and while Herald's investment philosophy includes the fact that they "endeavour to offer a relatively low risk way of investing in stocks with high risk on a sufficiently diversified basis that the risk is greatly diminshed", the NAV now is about the same as what it was at the height of the dotcom boom, whereafter it fell from 700p to 200p. If I had invested in June 2007 at a NAV of just over 470p+ (only 2/3rds of the dotcom highs), I would have been somewhat disappointed to only have 370ish of NAV a year later and 240ish, 9 months after that.

Lastly, for long term investors, discounts and premiums tend to unwind over time.

This sentence sounds common sense, but if you bought Herald in 1994 presumably it was not on a 20% discount, and now it is, after 19 years. So a 19 year investment horizon does not guarantee you won't sell at a discount to fund the baby's university years. Now the return over that time might have been very tasty, but all risky invesments can produce tasty returns over two decades, so that's a different point.

If you bought Herald at the bottom of the market in Feb/Mar 2009, you could have picked up 240p of NAV for 190p of share price. That's a 20% discount. You are saying that now, while markets are at all time highs, it is also giving a 20% discount, and you are also saying that discounts and premiums unwind. At what point of the market will I recover the discount and where will the shareprice be then? If this is an unanswerable question, you can see why prospective investors are put off.

As a counterpoint, I bought Scottish Oriental Smaller Cos in August for 621p against a NAV of 663p. Today the discount has turned into a premium, I could sell for 897p against 884p of NAV. My return is 44% against a NAV improvement of 33%. On HVPE over the same timescale my shares are up 25% in GBP terms and the underlying dollar NAV only went up 7% in six months; the shares are still at a discount of 20%+. So I am not denying one can benefit from discount prices but this doesn't help a buy-and-hold investor who will exit when he needs the money whether the discount has tightened or widened.

I hope this helps lend some colour to your article on Herald which will not just be a shameless puff piece from reading their marketing document and selectively picking timescales without acknowledging the wider issues.

As a side note, Herald traded at 599.5p Friday against its reported 697.5p Thursday NAV, so the discount is nearer 14% than 20%. Hope you get your article out while it's still relevant.
http://www.heralduk.com/docs/NAV_historic_to_Feb_2013.png

IrnBruMan

bowlhead99 I have just come across this post you made which is very unfortunate because you went to such admirable lengths to respond. It is a shame that these boards don't email when a response has been received.

I am on a train as I write and off for a couple of days sailing.

If you are still around I will delighted to respond more fully to your efforts when I am back in London.

The Herald articles were published some time ago. I don't have a link but if you search in the search box of whichinvestmenttrust.com for Herald it will come up.

If you do get my message many thanks for your response, it is both comprehensive, well thought out and argued.

I do have access to the research on open ended vs closed ended performance to share.

ColdIron

IrnBruMan wrote: »

It is a shame that these boards don't email when a response has been received.

Although they can email you when a thread to which you have contributed recieves a new post

Reaper

As ColdIron says there are various options. Click on the "User CP" link (on the green bar near the top of this page), then "Edit Options".

Under "Default Thread Subscription Mode" pick the one you want. You can select 1 of 3 email options, as well as "no email notification" which is the one I use. That one does not send an email but does mark all the threads you have contributed to making it easy to check for replies.

IrnBruMan

Thanks Reaper & ColdIron I'm on a phone right now with a dodgy connection travelling through the countryside by train.

I'll change my settings as soon as I can. Thanks for your help

A_Flock_Of_Sheep

dunstonh wrote: »

Don't expect iFAs to go IT crazy. They are still classed as being more suitable for a more experienced investor and typically more volatile pushing them further up the risk scale on a like for like basis with OEICs. With the FOS generally considering the average consumer as being relatively cautious and typically stupid unless proven otherwise (my words, not theirs), IFAs have to be careful that not only the risk level is right but the capability to understand and ITs are still generally a notch higher than OEICs in that respect.

The DIY market may actually see a greater move to ITs when everything is unbundled. DIY consumers tend to invest above their risk profile and follow fashion investing. ITs could be right up their alley. (generalisation alert acknowledged )

I am not an " experienced" investor but I prefer ITs to OEICs and Unit Trusts. Maybe I am following fashion investing but I wasn't aware ITs were fashionable. My main liking of ITs is the fact they are priced in live time.

IronWolf

There are big differences between open ended and closed ended funds.

1. Open ended is a drag on performance as the more money you have, the lower your returns are as your investment options become more limited.

2. The manager of an open ended fund is not solely focussed on good long term returns. They are also focussed on assets under management which means good short term performance as well. A closed ended fund manager doesn't need to worry so much about short term movements and so can operate with a longer term strategy which will yield better investment returns.

3. You are much more likely to find a manager with a significant personal stake in an IT than an open ended fund.

4. Discount to NAV provides good opportunities to buy with some margin of safety.

dunstonh

A lot of the reasons given as positives for ITs can also be negatives. Yes, many have increased growth potential. However, that also comes with increased loss potential as well. Gearing and discount/premium to NAV can work for you and against you. ITs tend to be more volatile than equivalent OEICS.

ITs can hold back some of the income to pay in later years. If you are not invested in those later years, you can lose out.

The reason I say you have to be more experienced is that if you don't understand the increased risks or the premium/discount issues then you could lose more more. Understanding the increased risk and doing your research so you know the discount/premium before buying is important. If you do, then its fine. However, if you don't you are more likely to get your fingers burnt.