Investment Trusts?

kidmugsy

We used to invest in ITs a lot. Decades ago open-ended funds were far too expensive and ETFs either didn't exist or I'd never heard of them, so ITs were an excellent option.

Nowadays I suspect that cheap tracker funds/ETFs are superior for many purposes, but I'd still entertain the idea of ITs for specialist purposes, such as illiquid assets. For example I'd be loath to invest in property via open-ended funds. I'd also consider ITs for active, defensive management (such as Personal Assets Trust, Ruffer Investment Company, Capital Gearing Trust). If there are any stock markets you fancy where you think trackers might be unsuitable then ITs might be well worth considering.

I don't suppose we'll invest in large firms in mature markets (e.g. USA, UK, Japan) except in trackers.

bostonerimus

I avoid ITs/Closed end funds for the following reasons.

I'm an index investor and so avoid active management
I like to keep costs as low as possible and ITs tend to be more expensive than index funds.
I don't like their use of gearing.
I don't want to have to bother with premium and discount spreads.

Sue58

I'm trying to get my head around the premiums/discounts.

As an example if a trust is trading at a 10% discount it enables you to buy £100 of asset for £90.00. However, when you come to sell if its still trading at a 10% discount there is no gain? You only gain if you sell at either a lower discount than 10% or hopefully if the trust hits a premium. Is my understanding correct?

JohnRo

Yes that's correct, a discount could also widen further meaning you lose even more than whatever performance the assets within deliver, which itself is then compounded by any gearing.

ColdIron

Sue58 wrote: »

However, when you come to sell if its still trading at a 10% discount there is no gain?

There will be if the share price goes up

You only gain if you sell at either a lower discount than 10% or hopefully if the trust hits a premium.

Or the share price goes up

Is my understanding correct?

Apart from the share price going up thing

Don't forget the premium/discount is just a measure of the difference between the NAV and the share price and these can move independently (therefore changing the premium/discount)

What you care about in terms of gain (or loss) is the share price that you buy and sell at. In your example where you bought £90 of shares, if the share price went up 50% and you sold them you receive an extra £45, that's a gain

Reaper

In theory if you buy at a discount the dividends may also be higher since you are getting more shares for your money than you would than if you bought the underlying shares directly.

It used to be that investment trusts pretty much always traded at a discount, but there seem to be more premiums around now.

dividendhero

It's well known that Hargreaves Lansdowne don't exactly shout about IT's. Just been reading "In for a Penny" by the Peter Hargreaves - he believes that IT's aren't very good because being closed end the managers have no incentive to achieve good performance.

While I can understand this point, the bottom line to me is two fold

(1) The average IT outperforms the average UT
(2) IT's have been around since 1868 and have withstood world wars, depressions etc. UT's are very much 1970's onwards

ColdIron

dividendhero wrote: »

he believes that IT's aren't very good because being closed end the managers have no incentive to achieve good performance.

Continued employment by the Directors and shareholders may be a factor

atush

TUVOK wrote: »

I have always only invested in shares and funds, never in Investment Trusts.
Could more experienced investors give their opinion on the benefits of opening one or more, and perhaps giving their opinions on which one's are worth considering?
Thanks for any/all replies.

I started investing in ITs over funds as they were cheaper re charges. Esp in the in house savings plan.

I like that they are traded as shares, which means it is easy to get your money out. Funds sometimes have difficulty if too many holders want their money all at once.

I like the idea that some have been going strong for over a hundred years. I like even more, a number have been increasing dividends year on year (despite downturns) for 40-50 years or more.

Which ones depend on you and what you want need re growth, income etc. I invest in 4 via reg monthly amounts. But have a list of others for our DD sipps.

londoninvestor

ColdIron wrote: »

Continued employment by the Directors and shareholders may be a factor

Also, closed ended doesn't mean that the trust can't expand by issuing new shares to meet demand. City of London does so pretty regularly, for example.

Unlike OEICs though, this doesn't happen automatically - the board (and ultimately shareholders) have the choice.