How times are changing in the market

Tony Lyons looks at the recent revival in interest in the long- neglected investment trust sector

Life is becoming exciting in the world of investment trusts. After a period of lacklustre performance, which has seen the sector lagging behind the rise in top quality share prices, it is now going through a time of change.

Just recently we have seen investment trust managers being voted out by shareholders, while some funds have chosen to turn themselves into unit trusts.

The history of investment trusts dates back to the 1860s when a number of wealthy individuals formed a company to invest in bonds issued by the colonies and the USA. In 1868, this became the Foreign & Colonial Investment Trust. With net assets of pounds 2bn, it is the largest of the 350 or so investment trusts listed on the stock market.

"In total, the market capitalisation of the investment trust sector now exceeds pounds 52bn," according to James Rath, secretary of the Association of Investment Trust Companies.

Investment trusts differ from unit trusts and other collective funds in that they are public companies with their own board of directors. Their shares are bought and sold in the same way as any other listed stock.

Until a decade ago, because investment trusts were companies, they could not promote their own shares. The Financial Services Act let them offer savings schemes to private investors. The growth in personal pensions and personal equity plans (PEPs) has given trusts a chance to sell directly to the public and through independent financial advisers.

Because they are listed on the stock market, share prices of investment trusts are determined by investor demand. If this is low, the share price can be below the trust's net asset value, the total value of its investments divided by the number of shares in issue. This is called a discount. Today, the average discount is around 12 per cent, allowing investors to buy pounds 1-worth of assets for 88p.

The industry is trying to narrow discounts. Some trusts do this by buying in shares. Others are turning into unit trusts. A number of trusts have a winding-up date. For example, Invesco Blue Chip is currently winding up and its investors have the choice of taking their cash, transferring into Ingot, a new fund, or moving into a high-income unit trust or money fund managed by Invesco. Recently, Legal & General proposed to take on the management of the pounds 340m Baring Tribune, an international trust, and turn it into an index tracker.

In some cases, trusts are changing managers to beef up performance. Managers are also being voted out. For example, last year Saracen Value Trust shareholders voted to move into Invesco's English and International Trust.

Investment trust charges are low. Unlike typical 5 per cent initial charges with unit trusts, there is only the stockbroker's fee plus 0.5 per cent stamp duty when buying investment trust shares. Annual charges tend to be well below 0.5 per cent a year.