Investments and Returns - Example

Malthusian

What I don't quite understand is what are the advantages of using Investment Trusts over, say, an Equity Income fund such as Woodford or Invesco Perp. Income.

- Some investment trusts have lower charges than some unit trusts (like IP Income). The view that investment trusts are cheaper than unit trusts is rather old fashioned and pre-2012, when unit trusts often bundled in the cost of advice and investment trusts did not. Nowadays unit trusts do not pay commission so the playing field is level, and unit trusts often have lower annual charges (especially trackers). Investment trusts are also much more likely to have performance fees which should be avoided - they can sound "fair enough" but in reality they are a massive drag on performance.
- Some people also view the ability to buy investment trusts at a discount to the value of its underlying assets as an advantage. IMO this is neither an advantage nor a disadvantage: when you come to sell the discount may have narrowed or turned into a premium, or it may be even bigger. The expected value of the gain from the premium / discount is zero.
- As george says, they are traded on the LSE, so unlike unit trusts there is little risk of the trust being suspended if it cannot sell enough assets to meet outflows. You simply buy the shares in the trust from someone who wants to sell and vice versa - the investment trust manager is not involved. This is only a significant consideration if you want to invest in property or other illiquid investments.
- Investment trusts can borrow to invest. Whether this is an advantage depends on your attitude to risk. In good years it can boost returns, in bad years it can exacerbate losses and even cause the fund to collapse, losing all the shareholders' money, if the fund cannot pay the interest.

I own a couple of investment trusts, one of which has done exceptionally well. But in general I use unit trusts because investment trusts carry more risks (at minimum the risk of the discount moving against you) and I see no evidence that these are compensated for with higher returns.

And yes, investments should always be made using your ISA allowance unless you are going to use it for something else.

EdGasket

How about you invest £10,000 in any or all of Naibu Global, CamKids, Shaft sinkers, China Chaintek, Mar City ...the list goes on but know what? Yep, you just lost £10,000.

Hopefully this may make investments a little clearer and help explain some of the misinformation about risks. Yes the price of shares does go up and down but if you have no need to ever access the money then it could be worth investigation.

Oh and don't say Investment Trusts can't go bust because they can, look up Edinburgh New Tiger Trust

atush

Jim,

thanks for this post as it illustrates what I have said to many looking for income but afraid of investments.

And to george for mentioning the reinvestment of dividends whcih I currently do with all my IT's but will look to take income income in future.

As to Kangoora, a big factor for me preffering Its over Oiecs is that as being closed, the shares rise and fall with market demand and so the Trust isn't forced to sell investments in the event of market falls and people want to withdraw their funds. This happens to Oeics, and it can enhance any downturn in share price.

Another reason is, even before low cost platforms for ISas and the like, investment trusts have been a cheap way to invest if you go thru the provider with a savings plan, paying very tiny charges for buying shares.

I started a couple of decades ago when I only had a hundred or two to spare so could invest this cheaply and over time it has been a very good investment for me. Obv these days it can be almost as cheap to use some platforms but I still have my little savings plans ticking over silently accumulating in the background.

atush

EdGasket wrote: »

How about you invest £10,000 in any or all of Naibu Global, CamKids, Shaft sinkers, China Chaintek, Mar City ...the list goes on but know what? Yep, you just lost £10,000.

Hopefully this may make investments a little clearer and help explain some of the misinformation about risks. Yes the price of shares does go up and down but if you have no need to ever access the money then it could be worth investigation.

You make a point which would be far more pertinent if JJ had been comapring another high risk trust, rather thah a more conservative trust who looks to preserve capital and has a high dividend. Rather than the poor performing 'growth' trusts you picked that dont pay a dividend.

Esp as he picked one that returned a conservative 23% over 5 years, where as if he did like you did (as you picked the very worst performers) he could have gone with ones like Finsbury that returned 120% and perhaps even the Biotech growth trust that has turned 10K into 50K over these last 5 years (ie 500%)?

Lets us try to compare apples with apples and not oranges?

jimjames

kangoora wrote: »

Cheers for this. What I don't quite understand is what are the advantages of using Investment Trusts over, say, an Equity Income fund such as Woodford or Invesco Perp. Income.

Historically one of the main reasons to buy investment trusts has been the lower cost but since RDR (and before that fund supermarket discounts) this has largely disappeared and there is little if any difference and some are now higher than the equivalent OEIC.

To me the main reason now is slightly improved performance which studies have shown, unfortunately I don't have a link to that as well as the ability of the manager to more effectively manage the portfolio of the trust as they don't have to buy and sell to cover new subscription or investors selling to get their money back. Unit trusts (OEIC) will create and remove units if investors are buying or selling more than the number that exist. This is particularly relevant for sectors (like emerging markets or private equity) where shares may be illiquid and hard to sell or volatile where the price of forced sales could be much lower prices.

If more investors want shares in an investment trust then the price will rise to a premium but that still has no impact on the manager of the portfolio. Some OEICs get too big which then blunts the ability of the manager to invest the cash and get a decent return. As the IT is close ended, there are a fixed number of shares in issue, the manager invests and can adjust the portfolio as they see fit - but for performance not to invest new money coming in. I'd therefore expect the transaction costs to be lower for an IT.

Investment trusts also are able to use gearing so if you believe stock markets will largely increase in value long term this should help your investment.

Another advantage for me is that many trusts trade at a discount to the net asset value so you're effectively buying £1 worth of assets for 80 pence. This can also enhance returns for both the income and capital as your growth in based on the NAV not the share price.

EdGasket

atush wrote: »

You make a point which would be far more pertinent if JJ had been comapring another high risk trust, rather thah a more conservative trust who looks to preserve capital and has a high dividend. Rather than the poor performing 'growth' trusts you picked that dont pay a dividend.

Esp as he picked one that returned a conservative 23% over 5 years, where as if he did like you did (as you picked the very worst performers) he could have gone with ones like Finsbury that returned 120% and perhaps even the Biotech growth trust that has turned 10K into 50K over these last 5 years (ie 500%)?

Lets us try to compare apples with apples and not oranges?

It's easy with hindsight to pick a fund with say, 23% growth but if you had picked one of the following...(5 year losses range from 45% to 35%)

http://www.morningstar.co.uk/uk/news/69984/10-worst-performing-funds-in-the-uk.aspx

jimjames

atush wrote: »

Another reason is, even before low cost platforms for ISas and the like, investment trusts have been a cheap way to invest if you go thru the provider with a savings plan, paying very tiny charges for buying shares.

I started almost 20 years ago and at the time I couldn't find any other option that was as cheap for transactions. Even now I'm getting dividends reinvested for a few pence with some investment trust share plans.

Hard to remember now but back in 1995 before the internet was really available you paid 1.5% annual charge for investments along with 5% initial charge, so to find an investment that charged 1% flat rate was a revelation especially when you could compound returns over many years at such a low fee.

atush

EdGasket wrote: »

It's easy with hindsight to pick a fund with say, 23% growth but if you had picked one of the following...(5 year losses range from 45% to 35%)

http://www.morningstar.co.uk/uk/news/69984/10-worst-performing-funds-in-the-uk.aspx

And again, I will point out while you picked the 5 worst, JJ didn't puck the 5 highest incl the Biotech growth I pointed out.

It is fairly easy to pick any fund with a poor 5 yr record, so really not a true comparison in this case.

atush

jimjames wrote: »

I started almost 20 years ago and at the time I couldn't find any other option that was as cheap for transactions. Even now I'm getting dividends reinvested for a few pence with some investment trust share plans.

Hard to remember now but back in 1995 before the internet was really available you paid 1.5% annual charge for investments along with 5% initial charge, so to find an investment that charged 1% flat rate was a revelation especially when you could compound returns over many years at such a low fee.

And I too started around that time and chose them for the same reason. They also took small amts per month, I have one with invesco Perpetual i started at just 20 quid per month.

masonic

EdGasket wrote: »

It's easy with hindsight to pick a fund with say, 23% growth but if you had picked one of the following...(5 year losses range from 45% to 35%)

http://www.morningstar.co.uk/uk/news/69984/10-worst-performing-funds-in-the-uk.aspx

I think it was clear in the OP that JJ did not pick this fund in hindsight - this is an actual investment chosen many years ago. However, it's worth pointing out that picking a single fund with a narrow investment objective is a high risk strategy for the reason you illustrate. I'm fairly sure none of those funds got a mention here 5 years ago as ones people were investing in, so hopefully nobody held any of those funds.