'Equivalent' investment trusts

londoninvestor

aroominyork wrote: »

Say an IT releases £1bn of shares and then gears at 110% by borrowing £100m to buy more shares. This just means another 10% of people can invest - it doesn't affect the value of my underlying holdings.

No, your exposure and risk are genuinely increased in the geared trust.

Let's say there are two trusts, which launch on the same day, invest in the same portfolio (in % terms), but one (A) has no gearing and one (B) gears to 110%.

Let's also assume they borrow at the risk-free rate, so the NPV of the future loan repayable is the same as the principal of the loan. (In fact, borrowing costs will slightly drag the returns of the geared trust, but that's a separate point from the question you're asking here.)

Assume for ease of maths that both trusts launch with £1bn of net assets, and 1bn shares, so both start with NAV of £1 per share.

That means A starts with £1bn of equity assets, B starts with £1.1bn of equity assets and a £0.1bn loan.

Now let's say the market rises 20%.

- Then A has £1.2bn of equity assets - so the NAV is £1.20 per share.

- And B has £1.32bn of equity assets, minus a £0.1bn loan. The NAV is £1.22bn total, so £1.22 per share.

Similarly, what happens if the market instead falls 20% from launch?

- Then A would have £0.8bn of equity assets and a NAV of £0.80 per share.

- B would have £0.88bn of equity assets, minus a £0.1bn loan, so a NAV of £0.78 per share.

So compared to the ungeared trust, the geared trust sees its NAV rise further in a rising market, and fall further in a declining market.

The only impact on me is that supply has increased which might reduce the premium or increase the discount. Is that correct?

That would be the case if the trust expanded its asset base not by borrowing, but by raising cash from the issue of new shares. Some trusts do this as a means of keeping their premium in check (e.g. look at City of London Investment Trust's RNSs and you'll see frequent issuances of new shares). But it's not the same as gearing.

short_butt_sweet

in the HL page for the fund, you can see the fund management group, the named fund manager(s), and something about the fund's strategy and current holdings.

on the AIC site (already linked to), you can search by fund management group (using that dropdown). when looking at an individual IT, you can find the named manager(s) in the "Management" tab. occasionally, there is a similar IT run by the same manager(s).

in that case, is the IT cheaper, even in the situation when you're paying HL's 0.45% holding charge for the fund and nothing for the IT? not always.

compare the on-going charge figure (in the "Charges and gearing" tab) to the fund. but does the IT also have a performance fee (whether or not it's actually been charged in the last year)? some ITs do.

is the IT on a discount or a premium? a discount makes the IT effectively cheaper, provided that it pays dividends. e.g. if an IT has a yield of 3%, and is on a 10% discount, then the way i'd look at it is that you are getting 0.3% more yield that you would with no discount, so i'd knock 0.3% off the on-going charge to get the "effective" on-going charge. OTOH, if it's on a premium, this makes the IT more expensive. (and i'd avoid buying at more than a small premium anyway - perhaps no more than 2% or 3% premium.)

and how does the current discount/premium compare to its historic range? because you might be reluctant to buy in (say) at a 2% discount if the discount has usually been over 10%. you can see the historical discount on the "Performance" tab: scroll down to the "Discount c.u.m fair" graph (and change the display from 5Y to 10Y to see further back).

even if it has the same managers, is the IT's strategy actually the same as the fund? are the current holdings at least similar?

does the IT use gearing? the "Charges and gearing" tab gives the current figure for gearing, and a historic range. if it does, it will perform differently from the fund. could be better or worse.

aroominyork

londoninvestor wrote: »

No, your exposure and risk are genuinely increased in the geared trust.

Let's say there are two trusts, which launch on the same day, invest in the same portfolio (in % terms), but one (A) has no gearing and one (B) gears to 110%.

Let's also assume they borrow at the risk-free rate, so the NPV of the future loan repayable is the same as the principal of the loan. (In fact, borrowing costs will slightly drag the returns of the geared trust, but that's a separate point from the question you're asking here.)

Assume for ease of maths that both trusts launch with £1bn of net assets, and 1bn shares, so both start with NAV of £1 per share.

That means A starts with £1bn of equity assets, B starts with £1.1bn of equity assets and a £0.1bn loan.

Now let's say the market rises 20%.

- Then A has £1.2bn of equity assets - so the NAV is £1.20 per share.

- And B has £1.32bn of equity assets, minus a £0.1bn loan. The NAV is £1.22bn total, so £1.22 per share.

Similarly, what happens if the market instead falls 20% from launch?

- Then A would have £0.8bn of equity assets and a NAV of £0.80 per share.

- B would have £0.88bn of equity assets, minus a £0.1bn loan, so a NAV of £0.78 per share.

So compared to the ungeared trust, the geared trust sees its NAV rise further in a rising market, and fall further in a declining market.



That would be the case if the trust expanded its asset base not by borrowing, but by raising cash from the issue of new shares. Some trusts do this as a means of keeping their premium in check (e.g. look at City of London Investment Trust's RNSs and you'll see frequent issuances of new shares). But it's not the same as gearing.

Yes, understood and thanks. What I was wrongly describing was just issuing more shares to investors; I was double-counting the inflow of funds, seeing it both from investors and from the borrowed (geared) income.

DrSyn

Alexland wrote: »

For a passive investor switching from fund(s) to ETF(s) tracking the same index(s) is mostly a calculation of the difference in management & transaction costs, platform ongoing and trade fees (particularly if the ETF is regularly distributing).

Alexland Can you please explain what you mean by "trade fees".

Mr.Saver

DrSyn wrote: »

Alexland Can you please explain what you mean by "trade fees".

The trade fee, in another word the dealing charge is what the platform charges you for buying or selling an investment.

For HL S&S ISA, there's no dealing charge for buying or selling funds, but there is a £11.95 charge per deal for buying or selling ITs & ETFs (assume less than 10 trades per month)

Sue58

squirrelpie wrote: »

I have an ISA and a SIPP with HL and historically have bought various funds in those wrappers. Now I understand a bit more about how the charges work, and the importance of minimising charges, I'm looking at replacing those funds with stocks instead. I currently think that investment trusts are sensible, along with ETFs.


So I listed all the funds I own and started trying to analyse what they are and whether there are IT equivalents, and which ITs are good or are dogs etc. It seems like it will be a hard grind. So I wondered if there are any tools on the intertubes that might help? Does anybody know of any site that compares funds against investment trusts etc?

Which funds are you looking to find equivalent IT's for?

londoninvestor

DrSyn wrote: »

Otherwise consider switching to another platform with a cheaper charge for the same funds you already hold. Just make sure they have those funds on that platform before switching.

This was the path I took when I was in a similar situation.