Investment Trusts risk query

bowlhead99

green_man wrote: »

If you look at companies that run ITs and an equivalent fund you see that over the long run its almost always the IT that has the better performance (likely due to gearing use)

Gearing can be one of the differences. Another thing that can affect the historic long run performance is the size of the management fee in the two offerings over the period. If you go back five years, the management fee of an OEIC would include an amount for adviser commissions (before the Retail Distribution Review) and platform commissions (before the Platform Review). Whereas for an IT, the company is just a listed share on a stock exchange that can be bought by anyone via a stockbroker, without an adviser to advise on it or a platform to hold it. As such the management fee of the IT could be usefully lower than an open ended UT or OEIC from the same investment management house.

This is not really the case now after the above mentioned RDRs etc but comes into it if you are looking at a historic chart of retail class Fund returns vs the IR returns.

Some sites show how the discount/premium varies over time so you can avoid buying at a premium if you feel it may fall back to a discount.

This is true. Of course, the discount/premium is driven by sentiment and market perception, just like the underlying market. This means that waiting to avoid buying at a premium or selling at a discount may mean you end up paying quite a bit more total to buy, or getting quite a lot less to sell - because the market goes up without you or drops before you exit, by a fair bit more than the premium/discount swing.

Waiting to see if I can get a better relative price to NAV, and then being hit with a change in absolute price driven by NAV, is a mistake that I and many others will have made, and doing the 'logically, most economic' thing won't always give you the right result.

In that respect it's a bit like another classic mistake I've made in Las Vegas - standing at a casino table waiting a few more minutes for a cocktail waitress to bring you a free drink worth $5 and then losing $50 at blackjack while waiting. The maths might say that while you're playing you'll lose on average half of one [bet size] in an entire hour so the smart thing to do is to play out another five minutes for another beer. But then you lose three hands in a row and realise that pushing the economics to try to squeeze the best return can quite easily get you a worse result.

maxie014

Wasnt nick train advising people not to buy his it because it was too expensive a premium?

http://www.thisismoney.co.uk/money/investing/article-2218627/Dont-buy-investment-trust-expensive-warns-Lindsell-Train-manager.html

Glen_Clark

george4064 wrote: »

- for many ISA platforms, ITs incur a smaller platform charge than UTs.

I didn't know any platforms charge for holding ITs - (X-O doesn't)
ITs are the same as holding share certificates - which I used to do and would still do if the platform charged for holding them.

green_man

bowlhead99 wrote: »

Gearing can be one of the differences. Another thing that can affect the historic long run performance is the size of the management fee in the two offerings over the period. If you go back five years, the management fee of an OEIC would include an amount for adviser commissions (before the Retail Distribution Review) and platform commissions (before the Platform Review). Whereas for an IT, the company is just a listed share on a stock exchange that can be bought by anyone via a stockbroker, without an adviser to advise on it or a platform to hold it. As such the management fee of the IT could be usefully lower than an open ended UT or OEIC from the same investment management house.

This is not really the case now after the above mentioned RDRs etc but comes into it if you are looking at a historic chart of retail class Fund returns vs the IR returns.
.

This is a good point I hadn't thought of.

I've got to admit in my case I have no real preference for funds or ITs I simply buy the fund or trust that I like the look of the best and which covers the particular area I want. I have several of each in my current portfolio.

luckylizard

This discussion has been really helpful for me, so thank you everyone. I've a much better understanding of the balance of risk in ITs relative to unit trusts/OEICS, and of how ITs work, and the cost issues. Taking it all into account, I can't see a sufficiently strong reason for me to dip my toe in the IT water quite yet.

jimjames

green_man wrote: »

If you look at companies that run ITs and an equivalent fund you see that over the long run its almost always the IT that has the better performance (likely due to gearing use) but as said above it comes with slightly more risk attached. Some sites show how the discount/premium varies over time so you can avoid buying at a premium if you feel it may fall back to a discount.

Another reason that I don't think has been mentioned yet is that long term an IT may benefit by not having to trade as much to satisfy redemptions and investments as a unit trust would. So the portfolio manager can buy and hold what they want without needing to worry about what to sell or buy to meet new demand.

bowlhead99

green_man wrote: »

I've got to admit in my case I have no real preference for funds or ITs I simply buy the fund or trust that I like the look of the best and which covers the particular area I want. I have several of each in my current portfolio.

Closed ended listed vehicles are perfect for holding assets that aren't liquid, or for obtaining long term finance to gear the returns.

For example, if you are a fund manager who wants to invest in a portfolio of care homes or a load of private businesses or a commitment to a venture capital partnership, it would be silly to do that in a vehicle where 20% of the investors could decide they want their money back on Monday. This might be through no fault of your own - e.g. because the market dropped - even though your fund is great and hasn't lost a penny, the investors are overexposed to your fund compared to their other holdings and so they need to pull out of yours.

In an open ended fund you would need to sell that proportion of your assets -- somehow sell a little bit of everything you own to meet the redemption request. Or cause panic by saying you can't meet redemption requests causing everyone to form a loud and persistent queue for the exit. The assets may be hard to value or impractical to sell in little slices or downright impossible to exit. In a closed ended fund the manager has no such problem, he has permanent capital at his disposal and people who like or don't like the strategy or the circumstances or their own portfolio mix can buy or sell the shares of the closed ended fund as they see fit.

So, my logic is a bit like yours -decide what sort of thing I want, then decide what would be a suitable way of holding it, and basically see what's on offer from different product providers across the spectrum. It might be an IT, or a REIT, or a company that isn't an IT but would be one if it was UK domiciled, or an actively or passively managed OEIC or UT. Or something else.