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| ITs could potentially provide a
complete range of tailored products for the retail investor.
But..... |
They are...
Investment Trusts(ITs) are like unit
trusts (UTs).Many of the issues are common to both and are not
repeated on this page.
The main difference is that ITs are packaged as public
companies, with shares issued to investors and traded on the stock
market like any other company. This small technical difference leads
to a big practical one:
Investment freedom
When an investor buys or sells an IT share, cash passes between
him and another investor. No cash flows in or out of the company.
So the investment manager is not forced to buy or sell investments.
This arrangement is called 'closed-ended'. Unit Trusts and OEICS
are 'open-ended'.
A UT manager is driven to sell when investors are
selling and buy when investors are buying. Given the well-documented
habit of small savers to sell at the bottom of the market and buy
at the top, this is the reverse of what he should be doing. And
the passive holder of units in the fund is dragged into this decision
- sharing, as a unitholder, in the subsequent adverse consequences
of the actions triggered by other misguided investors.
ITs, by contrast, can take decisions on exposure to
the market quite independently of other investors. This usually
includes the ability to use leverage
- buy shares with borrowed money - a double-edged delight denied
to UTs.
Other matters
A distinctive feature of ITs is the discount.
This is of great interest to analysts and very important when chosing
a fund: a good rule of thumb is never to buy if the discount is
less than 10% or sell when it is more than 15%. But we regard it
as largely irrelevant to the UT vs. IT debate for long-term savers.
IT costs are generally slightly lower than UTs, although
the improvement offered by OEICs has narrowed this gap.
In summary, UTs are simpler for the small saver to
cope with. But more sophisticated investors comfortable with direct
investment in shares are more like to prefer ITs.
But......oh dear!
Unfortunately, ITs have never quite shaken off the whiff of the
cowboy. And every so often, just when the odour has almost cleared,
another one rides into town.
Last time round it was the split-capital trust scandal.The
legal rights and wrongs are still being pursued. Whatever the outcome,
two things are true:
- The trust managers involved gave the appearance
of being either crooked or stupid. Neither attribute is desirable.
- No commentators saw this coming. Split capital
trusts were still being recommended in reputable advice to the
general public as late as 2001 when the first troubles were already
surfacing
Our view
Do not invest in trusts with more than one class
of capital. Tiered capital structures reflect the wishes
of salesmen, not financiers. How do you think the rights of the
different classes of shareholder are distinguished?
This embargo should be extended to trusts which have
warrants outstanding. Warrants are not shares, but are options to
buy shares. Option holders want volatility. You do not.
Large, long-established,
broadly-based, conservatively-managed trusts can safely be recomended
as low-cost tracker-type investments. Trusts such as Alliance
or Foreign
and Colonial. Minority trusts with clear objectives (investing
in Asian economies, for example) and well-regarded management are
the best way of investing in specialised areas if you like to do
that sort of thing. For the rest, until the whiff of saddle-sweat
dissipates.......
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