Investment Trusts - Just for Fuddy Duddies?









Peter Hargreaves thinks the managers of Investment Trusts are fuddy duddies (Daily Telegraph 26/3/2010 Are-investment-trusts-just-for-fuddy-duddies.html?).  I guess as a fan of ITs this makes me a fuddy duddy too!

I have never liked the 5% or so front end fees of Unit Trusts, their 1.5% or more annual management fees and daily rather than real time pricing.  They are also suffer the problem that when clients cash in they have to liquidate some of their stock portfolio - this is especially difficult for property trusts than hold physical property and therefor lack liquidity - hence during the recent crisis clients were unable to sell their holdings..

ITs don't have front end fees (though do of course have bid/offer spreads -but typically only 0.5% or so), usually have lower annual management fees and are traded in real time.  Their ability to borrow money (gear up) is a mixed blessing so also is their discount/premium to net asset value.  Promoters of ITs correctly say that an IT's discount to NAV is an opportunity to purchase a portfolio of shares at a discount - but unless the discount remains static (rare) there is the risk of the double whammy of a fall in NAV due to market conditions and an increase in the discount to NAV.  If however you are investing for income the discount to NAV is a real plus because if the discount to NAV is 15% then all other things being equal the dividend yield should be 15% higher.

A potential problem with OTs is that the UT sector is so strong and profitable for the management companies that they can attract the best managers.  However a little research will show that some of the best UT managers also run ITs and some of these IT's are remarkably similar to their UT brothers.


For instance Invesco's Neil Woodford is one of the UK;s most respected fund manager's and his defensive strategy has enabled his Perpetual Income UT to weather the recent market turmoil better than most.   After Invesco's acquisition of the Edinburgh IT Woodford took over as manager in September 2008 and almost overnight changed its porfolio to mimic that of his Perpetual Income fund.  It now offers a yield of around 5% compared to 3.8% from the UT.  The IT's management charge only exceeds 0.6% if the fund performance exceeds that of the FTSE all share by more than 1.5% and it is capped at 1.6%.  The UT has a flat 1.5% annual charge and a 5% upfront fee.  

Fidelity's Special Situations UT and Special Values IT were once both managed by Anthony Bolton - one of the UK's best performing managers.  The funds were virtually identical and over the last 5 years the IT delivered better performance than the UT - ( 65% NAV growth compared to 56% of the UT.growth).  But .... the dreaded discount to NAV strikes again! and the advantage over the UT was wiped out by the discount to NAV which started to deteriorate on the news of Bolton's scheduled retirement in 2008.

So all is not good news about ITs but for me they offer transparency, tradeability, low costs and the opportunity to achieve a better dividend yield.

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