Investment trusts: what you need to know

More sloppy journalism from CityWire. The paragraph on "Costs" discusses two utterly atypical Investment Trusts and Julie Patterson's remarks (under "Trading Costs") are obscure and tend toward waffle.

Properly researched, Investment Trusts can offer excellent medium-term investments at very low costs. Just steer clear on the VCTs, SPLITS, "Hedgies" and other arcane varieties.

The major point missed is that , unlike unit trusts, investment trusts are in control of their capital over the long term. With unit trusts, the tail wags the dog i.e. they have to buy stocks, often at a high point when more money floods in, and be forced sellers ,often at a low point when confidence ebbs. Hence Investment Trusts generally outperform as they have a much more viable model.

But I think you need to highlight far more the practice of investing in other funds within the same group - the charges end up being much higher - ie a fund of funds. At least this is mentioned ! It should be a rule/benchmark - the percentage of overall funds invested in the the same companies funds.

I think Julie Patterson is actually confirming that ITs are significantly cheaper than UTs / Oiecs.

(Recently I discovered in a phone call to Fidelity that they have been paying 0.5% of my investments EVERY YEAR to a someone who provided the application forms so I could make the investment in the first place. Apparently this is standard practice!! This was never discussed or explained. It certainly doesn't happen with ITs.)

It would seem that this is the practice being defended by Julie!

However thank you for the article - but would also point out that your example of the TER of BH Macro would make it one of if not the most expensive IT.

You could instead have chosen to emphasise that:

- on average IT charges are very significantly less than UTs

-if a manager runs an IT and a UT the IT returns are higher

-that the amount and quality of information provided in IT annual reports is definitely superior to IT info

etc etc!!

How are ITs taxed out of interest?

Investment Trusts are to me the best format for investing (with regard to cost and return)......I only wish there were more of them!

It always amuses me when punters (and financial journalists) get their knickers in a twist over investment trust discounts. How many supposedly "blue-chip" companies have assets that are less than their liabilities - take British Airways, for example, said to be "a large pension fund with a small airline attached". Look at all the US car-makers. A "discount" in an investment trust only really matters when the investment trust winds up.

I am perfectly happy to invest in an investment trusts with a big discount, and a high total expense ratio, provided they perform. For my purposes (increasing the value of my investments) net asset values and discounts are completely irrelevant. But I do monitor investment trusts' performance every month. There is a hard core of about 30 which consistently beat the FTSE All-Share over 1, 3 and 5 years. Only three of those are in Citywire's top ten (SST, BRWM and MYI). How could you leave out Edinburgh Dragon or New India or JP Morgan Emerging Markets?

I wouldn't know where to start when investing in (say) Far East smaller companies. Fortunately because of brilliant investment trusts like SST and AAS I don't need to do the research.

It may be significant that there are no "UK growth" investment trusts in my "hard-core 30".

Unit trusts are a very poor relation, recommended by IFAs because they pay commission. Investment trusts almost invariably outperform the same provider's unit trusts.

I have used Alliance Trust Savings for 20 years and found it satisfactory.

I don't buy into this - I've got IT investments (all monthly saving plans) but UTs are not that expensive if you know how to buy them.

UTs: you can buy from Fundsnetwork for 0% upfront cost using a discount broker (compare to ITs upfront costs like stamp duty and broker fees).

You can get the trail commission back from Fundsnetwork directly now if you use the right broker(i wont say which) reducing UT TERs to about 1.1%.

How do you invest regularly in ITs - some don't have savings plans. Those that do often charge 1-1.5% up front (compare to 0% upfront for UTs). If they dont have savings plans you are faced with broker fees for each transaction (?£10)- not suitable for diversifying a portfolio by investing in a number of funds.

You cannot easily switch between investments with ITs eg liquidate holding and have to wait for return of cash from manager before reinvesting.

You dont get problems with discounts/premiums with UTs that you do with ITs (my biggest bug-bear)- that creates extra volatility as the value of your investment see-saws with the performance of that investment category and that of your holding in relation to its peers eg JPM smaller companies, was good now bad absolute and relative performer so on big discount

Just my point of view - UTs are not that costly and make up for it in choice and flexibility. ITs are useful for diversifying or taking advantage of unexplained discounts if you are an active trader

Can someone explain the difference between an IT and an ETF?

What disappointed me concerning the Citywire Article, was Citywire's failure to draw to everyone's attention, that, with a little effort anyone who was considering investing their cash into an Investment Trust, can ascertain how much of their own money the Investment Managers have invested - similarly the Board Members.

I wd "look twice" if I was considering investing in an Inv Tst and noted from the Accounts, a Chairman who was being paid a Fee of say, £20k per annum, and had a Shareholding in the Company valued at, say, £5k.

The same comment, but of greater importance, is the extent of the Investment Manager's stake in the Company.

Dennis, an IT is a company set up to invest within a mandate in the same way that a UT or an OEIC might, but obviously with the added factors explained in this article. An Exchange Traded Fund is a cheap tradeable share that follows an index e.g the FTSE AllShare etc. Hope this helps

Dennis & Anonymous 2 - An investment trust I understand - it is a company set up to hold other companies' real shares.

If I can be cynical, an ETF is a phantom, a chimera, a virtual investment. I understand it follows an index, but how it does it and what it actually is nobody has ever been able to explain to me. I'm afraid I have a rule that I don't invest in what I don't understand.

I remember (just!) the great split-capital investment trust crash. Then we had lots of IFAs pushing their clients to buy investments the clients didn't understand.

I don't think it's as simple as saying that ETFs just track an index, some do and act very similarly to UT's but with much lower costs due being much less active than a UT. Also it's true that some are just placing bets and counter bets on the movement of cmmodities, however I have come across a few who seem to hold shares and assets in the same way that a UT or IT does eg dividend trackers who own blocks of the highest yielding shares and distribute the yield to shareholders.

I have notice that the top ten holdings of UT and ITs in a specific sector are often the same and have started looking for ETFs with similar underlying investments but much lower costs.

Split cap trusts were something different, that was a situation where a group of funds just invested in each other and it amounted to a ponzi scheme. (Actually isn't that the way that stock markets works but on a larger scale?)

I find Citywires take on investment trusts a complete waste of time. For good information you need to research a definative source such as "Trustnet".

In particular I do not know why Citywire cites the two trusts it does, I invest in a number of different ones and have never looked at these two in detail.

This would suggest to me that were not even worth looking at!!

Yes I am becoming tired of the low standard of reporting and debate on Citiwire (it's like the Daily Mail) and might just cancel my membership.

BH Macro and Bluecrest were used as examples because they are in the 'Citywire Selection' chosen by our analysts. They were also the trusts that provided the starkest example of how total expense ratios do not always represent costs effectively.

We are aiming to publish similar pieces on ETFs so will try and answer some of the questions posed here already. One will be on the ETFs included in Citywire Selection and another on what an ETF is. As ever we will try to follow up on queries and criticisms from readers.

Some of the points made above are helpful - particularly the issue of investigating whether managers and directors are invested - and should be added to the story.

I would like to see citywire publish real performance data over 1-3-5 years for IT and UTs like Trustnet seem to do..(only just discovered)

I find the performance figures on Citywire seem to be based on Bid to bid prices with income re-invested and before TER charges, upfront fees and trailing comissions etc ..

This approach blurs the real return from an IT or UT and makes it very difficult for an investor to answer the simple question. How much actual cash would I got back after 5 years if I had invested in IT or UT XYZ....When i invest in a bank account in a 5 yr bond the bank is oblidged to make it clear exactly how much actual cash I will see...

PLEASE make it clear for the novice investor to understand exactly what they would have got back in an IT or UT and more investors might actually part with their cash...

Mike D and others -

All this concentration on TERs and how much you will get back from investing in an investment trust ignores one very important point - that if you choose right, TERs, and performance bonuses to the IT managers, become almost irrelevant.

Using Trustnet you can draw up a list of investment trusts which have beaten the FTSE All-Share over 1, 3 and 5 years - it normally comes to between 40 and 50. There is an advanced search facility that lets you pull off these without ploughing through the results for all 600 listed. Do this every month and check how many times each trust appears in your list. You will be surprised that it is the same trusts that appear every month, and they are not always the ones all the commentators recommend - no Impax Environmental Markets, no TR Property, for example.

What you will think surprising is how well these trusts are performing. If (for example) Aberdeen Asian Smaller Companies will give me 145% growth over 5 years, for all I care the TER can be 5% (I've no idea what it really is) and the manager can have a whopping bonus.

What you do have to do is to keep monitoring your portfolio. If the investment trusts have not been performing for (say) 4 months, sell them and buy ones that are now performing. JP Morgan Chinese was a star performer last year, but it is not performing this year. You can always buy them back when they do start performing again - I keep a "Sold-but-Watch" list in a virtual portfolio.

Sorry, but there's no substitute for hard work. Don't rely too much on commentators - even Citywire, though I do owe them a big thank-you for tipping Pursuit Dynamics . . . . . .

Thanks for the advice gentlemen I will have a look at trust net but I still think that Citywire do an excellent job so I wont be deserting them . To save me a lot of time can anyone recommend three or four good income investment trusts with mixed portfolios

The problem with a lot of ITs UTs and even some ETFs is that for a given sector they are all invested in the same companies eg anything to do with UK income has Astrazenica, Glaxo smith kline, BP, Shell, BAT, etc. Makes you wonder what the fund managers spend their time doing.

Dennis -

My sentiments EXACTLY.

Forget UK income, the ITs are not performing.

My top 4 are :

Standard Life UK Smaller Companies

Aberdeen Asian Smaller Companies

Edinburgh Dragon

Murray International.

But nobody would invest in just those, because they'd say they weren't "diversified" enough. All you can say is that the managers of those ITs certainly earn their salaries.

And not a Glaxosmithkline or BAT among them . . . . .

1) Performance over 1, 3 or 5 years can be misleading. One good year 5 years ago will provide fat to keep a failing trust up the tables for later years. Discrete annual performance i.e. what the trust did in a 12 month period, reaching back over, say, 5 years and so 5 times, can give a view of solid, steady performance, or not. See Money Management mag. tables. That is if you believe past performance will be repeated.

2) If you like to do asset allocation UTs are easy. What the label says tells you where they invest or the style. ITs are cryptic; e.g. what does Edinburgh Dragon do? ( no need to answer that one).

David E -

That's why you have to do your homework each month. The good year 5 years ago will fall out of the calculations in due course, and may kick the trust out of my list. Nothing gets into my list if it has not beaten the FTSE All-Share over 1, 3 and 5 years as at that particular date.

Each month I collate the figures for 1 year, 3 years and 5 years, and the cumulative figures for the last four 12-month periods (I use Advanced Search on Trustnet, but Citywire or Money Management may be able to produce the same figures). Then I keep a record on Excel of how may times a trust appears in my list - Edinburgh Dragon is the only trust to appear each month over the last 3 years.

But you still have to keep selling and buying - JP Morgan China and Henderson TR Pacific were top performers last year, but poor this year. They have both fallen out of my list.

All I can say is, it works for me.

Despite the criticism of some of the experts above, I find extraordinary the amount of data and analysis that Citywire is making available free of charge.

I am a continent based investor and would love to have the same services for ucits distributed here. Thank you Citywire.