IT Portfolios - Top Ten Holdings

bigadaj

bostonerimus wrote: »

It's an observation based on the lack of discussion of percentage gearing and discount/premium pricing for ITs . Also as IT's are popular in the UK and are strongly marketed to the the average UK investor I don't see any reason to believe they are well understood by many that own them given the average level of financial knowledge. I hope that I am wrong!

I think it's just tacitly acknowledged and considered. Don't forget that ITs don't make up a huge proportion of the investment market for several reasons. Historically they weren't selected by advisers as they didn't pay commission or kick backs, and so were often cheaper than open ended funds.

They often have a far longer track record than open ended funds and were less susceptible to being quietly closed after a period of under performance and took a longer term view.

bostonerimus

bigadaj wrote: »

I think it's just tacitly acknowledged and considered. Don't forget that ITs don't make up a huge proportion of the investment market for several reasons. Historically they weren't selected by advisers as they didn't pay commission or kick backs, and so were often cheaper than open ended funds.

They often have a far longer track record than open ended funds and were less susceptible to being quietly closed after a period of under performance and took a longer term view.

I don't think many people selecting between say VLS100 and Scottish Mortgage Investment Trust really stop to think about gearing and pricing or the different fund structures.

Thrugelmir

bostonerimus wrote: »

I don't think many people selecting between say VLS100 and Scottish Mortgage Investment Trust really stop to think about gearing and pricing or the different fund structures.

The performance speaks for itself i.e. 95% vs 216% over the past 5 years.

bigadaj

bostonerimus wrote: »

I don't think many people selecting between say VLS100 and Scottish Mortgage Investment Trust really stop to think about gearing and pricing or the different fund structures.

If they were making that choice then gearing would certainly be a consideration for most people I'd suggest.

It would of course be a very odd binary choice for said people to make.

bostonerimus

bigadaj wrote: »

If they were making that choice then gearing would certainly be a consideration for most people I'd suggest.

It would of course be a very odd binary choice for said people to make.

It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared or even know what that means., but at 108% Scottish Mortgage isn't as high as some. The fact that I've never seen borrowing by Closed End Funds discussed in Investment Trust discussions [strike] Shirley[/strike] surely says something.

bostonerimus

Thrugelmir wrote: »

The performance speaks for itself i.e. 95% vs 216% over the past 5 years.

....and maybe the risk too.

aroominyork

On the issue of diversification to avoid duplication, shares of companies held by ITs can be duplicated within FTSE indexes. For example, if Prudential's share price rises, so does the price (or at least the NAV) of Monks which is part of the FTSE250 which in turn rises incrementally. So holding Prudential, Monks and a FTSE250 tracker risks three-way duplication!

PS Of course my error here is that the Pru is FTSE100 not 250 but you get the point.

Audaxer

bostonerimus wrote: »

It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared or even know what that means., but at 108% Scottish Mortgage isn't as high as some. The fact that I've never seen borrowing by Closed End Funds discussed in Investment Trust discussions [strike] Shirley[/strike] surely says something.

Although the gearing shows as 108% I think that means the gearing is actually only 8%, as all ITs show gross gearing as over 100% as far as I can see.

bowlhead99

bostonerimus wrote: »

It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared or even know what that means.

Inconsistency of gearing and leverage formulas and terminology quoted by people discussing the concept is the bane of many an investment newbie's learning process. They all use some form of comparison of borrowing to assets or equity but beyond that there are a range of formulas.

Most places outside the US will refer to gearing as being "by what percentage is my return enhanced from using the borrowing". So a £100m fund portfolio using 20 million of borrowing is '25% geared'. You get the returns on the investments financed by your 80m of equity and then on top you get the returns on the investments which were financed by the 20m debt; your gross return before borrowing costs is 25% higher than it would have been if you had just got the returns on the 80 cash that you fronted.

However instead of using the debt over equity ratio, 20/80 = 25% formula, some people will quote debt over total enterprise value ie debt over debt plus equity, being 20/100 = 20%. That lets you know what proportion of your total gross return has come from the debt finance (a bit like saying your £100k house has a 20% LTV mortgage). But it's less useful as it requires you to do some further mental arithmetic to see what that would mean for your gross gain or loss compared to the first method where the simple calculation told you what extra gross gain/loss you'd have compared to investing raw without the "assistance" of borrowed money.

Then there are people like you who will say that gearing is gross assets over net assets i.e. 100/80 = 1.25 and not bother taking off the '1' to get 25%. They just confusingly (to many people) say that's 125% gearing because they talk about the returns being 125% of what they would have been rather than an enhancement of 25% on top of what they would have been.

If you said to me that a fund is 'over 100% geared' I would think, "wow that's pretty ballsy" - because in common (UK) parlance that sounds like a lot of returns enhancement that could go very wrong. Knowing Scottish Mortgage has 5.8 billion of shareholder's funds at end of Q3, if you gear that up by over 100% the implication is that over 11.6 billion of investment portfolio is at work, which could halve in value and wipe out your equity entirely. Whereas in reality the assets gross of debt are 6.3 billion ; you have about 8-9% gross gearing (some roundings in the rough figures). Net gearing would be a bit lower by deducting any uninvested cash off the debt before doing the calculation.

Per SMT's last factsheet, they quote 'potential' gearing according to AIC guidelines at 8% (the amount of borrowings drawn, expressed as a percentage of shareholders funds), while 'invested gearing' would be borrowings at par less cash and cash equivalents actively invested, at 7%. You could call those its gross gearing and net gearing figures, but nothing is anywhere near the 100%+ level.

I think you are doing the investment community a disservice when you imply that a lot of people buying the investment trust don't know its total assets exceed its net assets. Gearing is discussed in every annual and semiannual report as well as being stated on every monthly factsheet and on the website. The vast majority of pounds invested by shareholders in the IT are from people who comprehend the concept of gearing and how it may fluctuate over time and hopefully enhance long term returns. Of course, like with any fund, investment trust or individual company, there will be a minority of the shareholder base who just bought it because they saw a pretty graph of it going up a lot in price.

With IT's you should be worrying more about gearing and price discounts or premiums. I seldom see those mentioned when people talk about closed end funds

The fact that I've never seen borrowing by Closed End Funds discussed in Investment Trust discussions [strike] Shirley[/strike] surely says something.

One of the things it might say is that perhaps you have not seen the gearing discussed because you do not take a great interest in investment trust discussions because you don't like actively managed funds ; you typically only pop up on threads that discuss them to remind us that you distrust active management and have done well for yourself by using passive vehicles.

Another thing it might say is that you have only been on the forum six months and the general concept of borrowing by closed ended funds is not something that has only started happening in that six month window so many of the discussions are conversations that have happened over the decade or more before you got here.

When people talk about comparing or contrasting ITs vs open ended fund vehicles there is usually some mention of some of the complexities or risk points such as discounts / premiums, gearing and the fact they do not have to pay out all their income in the year it is earned. However, there is not a lot of discussion about the specific gearing level of a specific trust from day to day. This is not a trading or marketwatch website. Before you mentioned the 8% gearing and I glanced at the factsheet, I couldn't have told you whether the current gearing was 8% or 12%; it is not something you reevaluate every day, you just employ the investment manager to go and follow his stated strategy and do his thing.

As an accountant with experience of the funds sector, I prefer working with closed ended funds to open ended ones because they are straightforward. The manager is managing a fixed set of assets and his day to day operations and production of a NAV is simple - compared to an openended fund there are no incoming and outgoing subscriptions and redemption to balance and no constant buying and selling of the assets to fund those investor inflows and outflows nor movement of the pricing point to reflect the costs of dealing with the inflows or outflows or deployment of cash into underlying assets.

Where the closed ended fund is itself listed on a stock exchange, the market will assign a price to the shares of the investment vehicle which might differ from the accounting value of the underlying assets it holds. Conceptually that is no different from saying the market will assign a price to Microsoft shares which might differ from the accounting value of its underlying assets around the world.

So, the workings of closed ended vehicles are quite straightforward to get your head around if you have the right mindset; and from the fund manager's perspective they are highly suited for holding illiquid assets (small companies, private equity, real estate, companies in which you have a relatively high percentage of ownership, etc) or indeed for any crazy strategy you might like involving any kind of assets. Little wonder that the concept of investment trusts have endured for more than a century.

bostonerimus

Audaxer wrote: »

Although the gearing shows as 108% I think that means the gearing is actually only 8%, as all ITs show gross gearing as over 100% as far as I can see.

I was careful to say "gross gearing". Of course people first need to distinguish between gross and net assets. This is not difficult, but I'm uncertain it is is considered by many people that buy investment trusts.