Golden oldies – investment trusts back in demand

They can be a volatile ride, but this type of fund is again attracting interest.

Six bids, one day. It was like the 1980s and the fictional world of Gordon Gekko all over again. Last Monday’s multi-billion pound bids for some of the world’s biggest companies could potentially have marked the start of fresh bull run for stock markets in the developed world.

Investment trusts are back. The world’s oldest form of collective investment fund – the first date back to the 1860s – are attracting investor interest once again.

These are listed companies that can invest in stocks, bonds and areas that tend to be less liquid, like private equity. By investing in a fund that has a listed company structure you have two potential sources of return. You can make money if the value of the underlying assets the fund owns – its net asset value – appreciates over time. And if you buy in when a trust’s share price looks cheap, you can also profit if it rises.

Like anything in life, what goes up can also go down, so investors stand to lose on both fronts if the trust’s net asset value decreases alongside its share price. You can also face a more volatile ride in comparison to unit trusts, as the limited number of shares available means the share price is driven by the vagaries of supply and demand.

Another important aspect to monitor is if the trust trades at a discount or a premium. This tracks the relationship between the fund’s net asset value and its share price. If a trust trades at a discount – indicated by a negative percentage – it suggests you are buying assets cheaply, whereas a premium could mean that you are overpaying.

The problem investors face today is that investment trust bargains are becoming harder to find. After a bumper year which saw the average trust snap up a double-digit share-price return, discounts have been pushed down to 3.4 per cent – their lowest level for 40 years.

“Nothing looks screamingly cheap in this listed market today,” warns Stephen Peters, an analyst at wealth manager Charles Stanley. “There are things you can buy on a 90 per cent discount, but there are probably reasons for that.”

Mr Peters advises investors not to focus solely on discounts. He says the prospects for the underlying asset class, alongside the style and track record of the fund manager, should take priority. This is because the growth in the trust’s net asset value is likely to be the biggest driver of returns over the long term.

He suggests the optimum strategy for investment trusts is to hold them over time, but aim to buy in when markets are weaker to ensure you aren’t overpaying on entry.

Nick Sketch, a senior investment manager at Investec Wealth & Investment, argues there are outstanding opportunities for the next decade to be found among investment trusts. In his view, selectivity and research will prove critical to picking the winners.

“With so many lazy or ultra-short-term investors, those who do the most work should get the best results most of the time,” he says.

He cites the Witan Investment Trust as one of his top picks. It currently trades at 680p, which represents a 6.1 per cent discount to net asset value, and offers a dividend yield of 1.9 per cent.

John Newlands of Brewin Dolphin highlights RIT Capital Partners, a trust that Lord Jacob Rothschild founded and chairs, as one to watch. It invests in equity funds, private investments and public equities. He says the 5.2 per cent discount on offer through its share price of 1,312p could represent an attractive entry point.

“You are getting access to some of the most skilled fund managers around and they have an unrivalled network of connections. Plus your money is sat alongside Lord Rothschild and his family,” he explains.

The British Empire Securities and General Trust could also attract the attention of those seeking a real bargain, in Mr Peters’s view. This trust seeks to invest in companies with share prices that are trading on a discount to their own net asset value.

“It is on a 13 per cent discount and you are getting a double-discount story as you are buying assets on a discount to their own asset value,” he says.

For those willing to take on more risk and the prospect of volatility, opportunities can be found among trusts that invest in small and medium-sized companies.

Here Mr Newlands highlights the Mercantile Investment Trust, which targets mid caps. It has has increased its dividend by 100 per cent over the past 10 years, currently trades on a 9.6 per cent discount to net asset value and offers a dividend yield of 2.5 per cent.

Among small-cap investment trusts, Mr Peters favours Aberforth Smaller Companies, which currently trades at an 8.7 per cent discount.

Emerging market equities have fallen out of favour with investors after a torrid year in which markets plummeted. But if investors buy into the longer-term investment story and are braced for potential volatility, Thomas Becket of Psigma Investment Management cites Templeton Emerging Markets as one to watch on a 10.4 per cent discount.

“There is a split between those areas that are in vogue, which still strike us as expensive. For example, infrastructure routinely trades on 10-15 per cent premiums, which reduces the yield on offer and makes it less attractive for new money. On the flip side, in areas that are out of favour – like emerging markets – you can still find good bargains for the long term. Templeton Emerging Markets is on a double-digit discount.”

The cost of investing in unit trusts is coming down as a result of new rules that ban financial advisers from taking commissions from products and force fund managers and brokers to be more transparent on pricing.

With this in mind, Mr Sketch anticipates the cost advantages of buying investment trusts over unit trusts will continue to narrow. However, these types of funds will still have a role to play, he says, given their ability to invest in less liquid assets, like infrastructure and private equity.

“I would expect the next five years to see more capital in investment trusts that do jobs others cannot, and to see less in investment trusts that do jobs that are just as well done by a unit trust,” he said.

Although the opportunities are harder to find, savers can still make money in investment trusts. Research and a willingness to hold a trust for the longer term will prove crucial if the last 10 years are anything to go by.

Danielle Levy is news editor at Citywire.co.uk

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
This year's models: buyers have plenty of options as they try to get the money together to drive away from the dealer in a new car

Car finance options: Best way to buy a 65 plate

Sales could find another gear as the '65' registration hits the forecourts next week. Rob Griffin looks at the finance options
In too deep? Travel cover is among the benefits offered by packaged bank accounts

Claims firms blamed as complaints soar over packaged bank accounts

Many customers complained they were switched to the accounts without their knowledge

Finger on the interest rate trigger: the Bank of England

The best deals on personal loans: Peer-to-peer providers are more competitive for smaller sums

Meanwhile, high-street lenders continue to cherry-pick and be more competitive on larger loans

China stock collapse: Five things you need to know about 'Black Monday'

The market plummeted this week, losing all the gains made for the year

Which? warns sports fans about Rugby World Cup ticket scams

GetSporting.com offers deals that may be too good to be true

Could it be the time to focus on Japan? Some believe the country has no choice but to boost consumption and the economy will get back on track

Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
As rising house prices push up demand for renting, so tenants are having to dig deeper than ever

Starter home initiative is urgently needed as rents go through the roof

Rents in England and Wales rose by 1.9 per cent in July to an average of £804

Peer-to-peer lending rates put Nisas to shame

The returns from P2P providers look more attractive than ever

Questions of Cash: Log-in problems turned eDreams booking into one-way ticket to nowhere

The company failed to provide our reader's flight ticket - or a refund

Hot property: business has been booming in estate agents this month, even though it’s the height of the summer holiday season

Heat rises for mortgage deals as UK homeowners sense a rate hike coming

The housing market should go quiet in August but instead people have been acting like cheap loans won't last. Do we really have to rush, asks Simon Read
Phones have now overtaken personal computers as the most used way of accessing the internet

Who you gonna call? The Complaints Busters

Unhappy customers have been given their own Ombudsman to help fight for them.

Undergraduates are being tempted with freebies by banks

Students should give freebies a wide berth and focus instead on cheap borrowing

An interest-free loan far outweighs the value of any of the bank's incentives

The Spanish carrier changed a reader's flight from Madrid – to a time before she was due to land

Questions of Cash: 'A connecting Vueling flight was cancelled and all my travel costs were left hanging in the air'

Our reader encountered problems when flying from London to Ibiza in May to take part in a charity ride

Complacency about rising rates could prove to be costly

Interest rates stay at 0.5% for now - but don't wait to get a better deal on your savings and mortgage

The years of ultra-low rates are coming to an end

The elderly are being targeted by fraudsters with postal scams such as fake prize draws

Fraudsters are bombarding older people with dangerous pension scams: here we reveal the warning signs

Many people are being repeatedly targeted by crooked schemes

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones