"Like all great British inventions the investment trust has not always been appreciated in its own land"

INVESTMENTS

The general investment trust is one of the great British inventions of the last century. For private investors, diversified trusts such as Foreign & Colonial and Alliance Trust provide one of the most flexible, efficient and cost-effective ways of investing in a well-managed general portfolio of shares and bonds there is. Even if he or she has the necessary expertise, the individual investor can only replicate the quality and breadth of investment management on offer at a high cost in time and expense.

Their regular savings schemes provide some of the cheapest collectively managed investment vehicles open to private investors.

Like all great British inventions, however, the investment trust has not always been appreciated in its own land. There have been times, like the mid-1970s, when investment trusts languished, forlorn and largely forgotten. Those who run them were often their own worst enemies: too many remained parochial in outlook, amateurish in management and marketing methods, and indifferent to the needs of their clients.

One consequence was that, 15 years ago, the average investment trust traded at a discount to net assets of the order of 30 per cent. In other words, the price the markets put on the trust's portfolio was nearly a third less than the current market value of the individual stocks and shares.

Anyone who bought the trusts at that time has since experienced a double benefit. They have gained from the general rise in share values; and they have also had a one-off benefit from the narrowing of the discount. The net asset value of most trusts rose sharply in the bull market of the 1980s and early 1990s. That the market now offers to pay you 90p-100p for each pounds 1 of shares your trust owns as opposed to 70p before is a clear bonus.

The 10-year performance figures trotted out by the industry to show how well trusts have done need to be interpreted in that light. A big proportion of the gains are the result of this one-off discount movement.

But in another sense, the historic discount was a serious barrier to investment trusts' progress, a monument to their lack of sparkle and to the market's low level of confidence in their abilities.

Today, the picture could not be more different. The best-known trusts trade at much healthier discounts and the sector has expanded out of all recognition. Specialist trusts, investing in specific countries, sectors, or regions, proliferate. Many also issue different classes of shares and warrants. The sector, in other words, is bursting with so many new ideas and new instruments that many ordinary investors are left bewildered by the choice.

My own view, reinforced by a recent visit to Foreign & Colonial, the doyen of the sector, is that investors today need to be more wary than before of what they choose to invest in.

The big, well-established general trusts continue to offer good value for those seeking a broad market exposure, and many specialist trusts are simple ways to play foreign or emerging markets. But be wary of split- capital trusts, which carry more risk for the unwary than those with conventional share capital structures. Investment trust "income shares", for example, sound reassuringly dull and predictable, but in fact are highly volatile securities which can lose you a good deal of your money if things go wrong.

The two questions that the investment trust sector has to answer in the next few years are these. First, can it, in its latest rush for growth, sustain the reputation for quality that it has so slowly and doggedly been re-established over the past 10 years?

It is noticeable that even Foreign & Colonial, an admirable operation in almost every other respect, has recently suffered a couple of embarrassing mishaps. It is hard not to believe this is not in part due to the hectic dash for growth.

Secondly, can the investment trust business ensure that discounts will not revert to the levels of 20 years ago? If that were to happen, it would impose a double penalty on those who invest today reversing, in effect, the double whammy that has worked in the sector's favour in the past few years.