ITs or Individual Co. Shares?

capital0ne

Would you buy FGT - Finsbury Growth & Income IT instead of holding individual shares? Namely Diageo, Unilever which I do hold and I like the others in FGT top 10?

Ditto for Merchants IT - if you hold RDSB, GSK, HSBC, IMB, and BA. individually.

Both of these ITs are at a low premium and have low charges.

Thoughts please

Herbalus

FGT is at a 0.58% discount - is that as small as a rounding error on things like these?

Also, and if this question is naive it's because I don't own ITs or individual shares, you pay a management charge on both ITs when if you just like the individual shares, why not buy those and not pay a management charge at all?

capital0ne

Herbalus wrote: »

FGT is at a 0.58% discount - is that as small as a rounding error on things like these?

Also, and if this question is naive it's because I don't own ITs or individual shares, you pay a management charge on both ITs when if you just like the individual shares, why not buy those and not pay a management charge at all?

Good point, my thinking as well!

But, if you own three or four constituents and are reinvesting automatically, then you save on 6 or so dealing charges per year.

Swings and roundabouts

bowlhead99

There are probably three main advantages to using investment trusts over individual shares.

One: diversification. Your risk is spread over a broader set of assets than you might be bothered to buy yourself. For example, Merchants has 45 holdings. If you have £100k to invest, to get 45 holdings you might put £3k each in your favourites and £2k in your 'quite like' and £1k in your maybes. The dealing costs and income reinvestment costs would add up and make those £1k holdings prohibitively expensive to bother with. So, you would end up not bothering and be more exposed to the larger holdings.

You probably have more than £100k to put to work in a portfolio but the above is just an example - there are also plenty of other different regions to cover with the rest of your millions (as Merchants is UK stock exchange focused). Finsbury is more concentrated than Merchants and is quite high conviction in terms of its top ten holdings as a proportion of its total portfolio, but it is still offering a convenient exposure as a one stop shop.

Two: tax efficiency. The manager can churn the portfolio as often as he likes if he thinks that a particular company is no longer a good value hold, but you aren't exposed to gains taxes when he sells (e.g.) Burberry to buy more Schroders. Only when you exit the collective vehicle itself does your CGT get calculated so you can compound the returns gross within the investment vehicle.

Three: research / monitoring, admin, handling of corporate actions, and investment selection is outsourced and the costs of it comes out of your pre-tax investment income or gains rather than out of your after-tax returns.

You may not be a fan of buying in paid advice for investment ideas and investment selection (some people like to do it all themselves as a hobby) but using an investment trust gets you a nice broad exposure to markets compared to what you might make for yourself with individual heavyweight picks, and it would take a lot of work and resources to properly cover (investigate /research and monitor) the thousand or so investible shares on the UK markets let alone the overseas ones. It's quite efficient to roll that up into a central cost shared across thousands of investors on a collective basis. So if the operating and transaction costs (including management fees) are not massive, why not let someone else do it for you.

So yes I do prefer using a collective investment scheme to buying all the components myself. Though if I do really like a particular share I might hold it myself direct, even though someone else has already bought a bit of it for me. For example I have exposure to Chinese business Tencent in a couple of collectives, but I really like it so I also have about 600 shares held directly (well, across my SIPP and ISA). If I only wanted £1k of it, it would be inefficient to buy directly (listed in HK, high telephone dealing charge with my broker) so would make more sense to just buy £20k of (say) Scottish Mortgage and trust their judgement that the other £19k was going to be in decent picks too.

dividendhero

I prefer IT's over individual companies, for the reasons put so eloquently by bowlhead99.

On top of the reason he/she stated, there are many great companies outside the UK. Holding these directly is a pain, really easy if held via MYI or HINT etc

Tom99

I have tried individual share collections on 3 occasions in the past. Two lots a 10 shares and 1 lot of 20 shares.
The overall performance was in each case an overall profit but not very different from buying 1 or 2 funds.
However I found the disappointment in a share that lost value greater than the joy in one that had increased in value - irrational I know.
Secondly after a while you are left with a potential re-balancing problem, your best share might have doubled in value whilst the worst is half what you paid.

Reaper

In the case of Merchants Trust they have increased the dividend every year for the last 36 years. So if the idea of a pretty reliable 5.3% (at the time of writing) yield appeals to you then the IT is the way to go.

EdGasketTheSecond

With individual shares you have the possibility to buy/sell as they fluctuate. The IT version may not move in price while its constituents do. So you can trade those sectors currently in favour against those not in favour until sentiment swings the other way then rinse and repeat. It does require a very hands-on approach though.

Albermarle

It does require a very hands-on approach though.

Basically a full time job if you take it seriously enough, and not what most ( even informed ) investors want to be spending too much time on.
The other point is that not all IT's are invested only in shares and some have a more complex portfolio of investments.

capital0ne

Thanks everyone, I'm in the gradual process of selling the odd individual share and investing in an IT that holds the same share for example FGT for my holdings in DGE and ULVR, MRCH or JCH for my holdings in RDSB, BP., GSK and HSBA and so on.

EdGasketTheSecond

capital0ne wrote: »

Thanks everyone, I'm in the gradual process of selling the odd individual share and investing in an IT that holds the same share for example FGT for my holdings in DGE and ULVR, MRCH or JCH for my holdings in RDSB, BP., GSK and HSBA and so on.

Sounds a good plan; pay someone to do what you already had for free!