Investment Trusts: Seeking the best way to Pep up share earnings: Paul Durman gets some tips on entering the market through personal equity plans

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The Independent Online
LOW INTEREST rates have prompted private investors to return to the stock market, feeding and supporting the optimism that has pushed shares to record levels.

Many private investors have used the tax benefits of personal equity plans to get into the market. As an indication, sales of unit trust Peps exceeded pounds 1.7bn in the first half of the year, almost three times as much as in the same period last year.

Investment trust savings schemes - the cheapest way of buying trust shares - have also contributed to the wave of share-buying. The trust managers' schemes bought pounds 100m of shares between January and June, pounds 74m from investors with lump sums.

The Independent asked stockbrokers to suggest some investment trusts suitable for those who want to invest through a Pep. Finding good value is increasingly difficult because the buying pressure from investment trust savings schemes has reduced the discounts at which trust shares traditionally trade to their net asset value.

Some trusts are now trading at a premium - which means that the investor must pay, say, 105p for every 100p of assets.

Ann Brint, an assistant director at Bell Lawrie White, says: 'The discounts on the investment trust sector are the lowest they have been for 20 years, but there is still a demand for shares. The private investor is not happy with the interest rates he's getting on his cash and is moving into equities.'

Mrs Brint, who is also manager of Bell Lawrie's investment trust management service, advises investors to stick to large non-specialist trusts. With narrow discounts in mind, she suggests Edinburgh Investment Trust as a stable core holding.

Edinburgh is a pounds 1bn fund with a large holding of UK equities, which is managed by Dunedin. It is paying a gross yield of 3.7 per cent and its discount exceeds 9 per cent. 'Dunedin has a good performance record,' Mrs Brint says.

She nominates Fleming Fledgeling for the investor looking for some exposure to smaller companies as the economy emerges from recesssion. This trust trades at a discount of 11.6 per cent, making it attractive alongside its peers. Its yield is only 1.3 per cent, so it is very much a trust for those looking for capital growth.

Flemings runs one of the most successful savings schemes, which gives Mrs Brint another reason to support Fleming Fledgeling. The wave of buying from the schemes will keep upward pressure on the share price.

Electric & General, an international growth trust managed by Henderson, is trading at a discount of about 10 per cent and pays a yield of 2.2 per cent. Mrs Brint says the trust has a consistent performance record.

Among the independently managed trusts, Mrs Brint recommends Scottish Investment Trust, which is on a discount of nearly 13 per cent.

Fred Robinson, a partner in Killik & Co, recommends investors take a look at Law Debenture Corporation, the unusual trust that combines investment management with a substantial business providing corporate trustee services.

'Although the shares would appear to be at a premium over net asset value, there's the growing value of the fiduciary side, which gives it a bit of spice,' he explains. 'They've got one of the best managers in the business in Michael Moule.'

Mr Moule used to run Touche Remnant's TR City of London Investment Trust. 'There's been a tremendous rise in net asset value, the share price is up and it's going very nicely,' Mr Robinson says.

Like his rivals, Mr Robinson is very conscious of narrowing discounts. 'It grates a little bit to have to pay a premium,' he says. 'The bigger companies that manage trusts have been able to throw a lot of money at marketing their funds.'

He suggests looking for value among the smaller management houses, which lack the resources to promote their trusts heavily via Peps and savings schemes.

He likes Finsbury Growth, managed by Finsbury Asset Management. 'It's an excellent fund with blue chip equities, but they have not been promoting it in the same way. So the shares languish at a bigger discount to net asset value.' The discount is about 11 per cent.

Mr Robinson's third choice is Temple Bar Investment Trust, a UK general fund whose pounds 225m is managed by Guinness Flight. Mr Robinson says the trust offers a better yield (of 5 per cent) than many rivals. And with substantial reserves built up over the years, 'there is little worry about it cutting its dividend'.

He says investors looking for a better-than-average yield should 'sacrifice some of the capital growth and go for something like that'.

Alan Heddon, a director of Capel- Cure Myers, is another fan of Temple Bar and its 'proven track record'.

For those looking for income and willing to consider split capital trusts, Mr Heddon suggests River & Mercantile, whose income shares pay almost 10 per cent. He also likes Fleming Income & Capital because of its structure and the quality of the management. The income shares pay 8 per cent but Mr Heddon says the package - income and capital combined - is also attractive.

Among the older and larger trusts, Mr Heddon favours Scottish Mortgage. This international trust has 60 per cent of its money in the UK and enjoys the 'proven management' of Baillie Gifford. The shares trade at a discount of about 12.5 per cent, and yield 2.5 per cent.

Capel-Cure Myers believes investment trusts will continue to become more expensive as savings schemes continue to bring in new money and discounts narrow further. For this reason, Mr Heddon finds it difficult to recommend Foreign & Colonial Investment Trust. Besides being the sector's largest trust with pounds 1.5bn under management, Foreign & Colonial has a consistently good investment record. But it pays little in the way of a dividend and trades at a negligible discount.

Mr Heddon says Capel-Cure Myers believes there may often be more benefit in buying an income trust. This could still offer the investor substantial capital growth if the underlying portfolio investments are re-rated by the stock market.

He says a proper appreciation of income and the possibility of a trust's investments improving their rating is of paramount importance: 'If you can get good quality management and a reasonable yield with prospects of capital appreciation, that has to be the best way to play it.'

Bell Lawrie White: 031-225 2566

Capel-Cure Myers: 071-488 4000

Killik & Co: 071-589 1577

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