A look at what's on the table

Figuring out which funds to invest in is never easy. Andrew Barker offers a guide
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The Independent Online
Everyone knows the warning "past performance is no guide to future performance" but, in the right context, past performance can provide valuable information when considering investment trusts. Before you use performance figures, however, it's worth looking at how they are calculated.

Performance and costs

The main thing to bear in mind with investment trusts is that they are companies. They issue shares which investors buy and sell, and they also hold other companies' shares, which make up their portfolio of underlying assets.

All shares have a bid and offer spread. The bid is the lower price, at which you can sell the shares, and the offer is a higher price, at which you can buy. Most spreads for investment trusts are below 1 per cent. When looking at performance, shares are quoted on a mid-market basis, ie the price between bid and offer.

Other costs to be taken into account includes stamp duty, a fixed charge levied on all share purchases, currently 0.5 per cent.

The costs of buying and selling vary. Stockbrokers tend to charge commission based on the value of the transaction. If you don't need advice, there are low cost, execution-only dealing services which, again, usually charge a percentage of the transaction.

The cheapest method, however, tends to be that of investment trust savings and investment schemes, where charges start as low as nil.

Working out a meaningful average based on all this is not easy. Most performance figures for investment trusts are therefore calculated on a mid-market basis, excluding costs.

Unit trusts can only be bought and sold through the managers, so the bid/offer spread can be precisely determined for each unit trust and performance calculated on an offer-to-bid basis including all charges.

Whenever the Association of Investment Trust Companies calculates average performances we use offer-to-offer figures for unit trusts. These exclude charges and are therefore comparable with mid-market figures for investment trusts.

Share price and NAV


Figures based on share price performance will obviously be of immediate interest to investors as they give a guide to the return to shareholders. Net asset value (NAV) performance, on the other hand, is the performance of the underlying portfolio that drives the share price and offers a valuable guide to the management of the underlying assets of the investment trust. The NAV is the value of the total assets held, less any liabilities, divided by the number of shares issued by the investment trust. It is therefore directly comparable with the share price.

Total Return

Performance figures are usually calculated on a total-return basis. This simply means that income as well as capital is taken into account.

The share price total-return figures shown in our tables are based on a pounds 100 investment over the period. It assumes shares were bought at the mid-market share price at the beginning and that any dividends received were reinvested to buy more shares. We assume the total investment was realised at the mid-market share price at the end of February 1998.

NAV total return is calculated in a similar way, assuming that pounds 100 was invested in the NAV and that any income earned by the investment trust was reinvested in the assets.

Comparing Like with Like

You can't compare a UK investment trust with a Far East specialist - the markets are vastly different and the recent strength of sterling will have had a big effect on the end result.

It will be more helpful if you decide on the risk profile you're prepared to accept and compare the performance of trusts within that sector: the more specialised the market, the higher the risk.

Compare the performance of the trusts within the sector on both an NAV and share price total-return basis. You want trusts that deliver consistent performance on both counts.

Andrew Barker is chairman of the Association of Investment Trust Companies.

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