Since I joined the financial services industry some 30 years ago the battle has raged between the champions of investment trusts and unit trusts over which are better. I have always found the debate somewhat sterile. The truth is both have advantages and disadvantages and investors need to choose based on the merits of each individual fund and their personal circumstances.
The Retail Distribution Review, a review of the funds industry by the Financial Conduct Authority, has banned the payment of commission on investment products including unit trusts. This should work in favour of investment trusts as there is no longer any commission bias.
Unfortunately, it isn't that simple. RDR has also had the effect of reducing unit trust charges, in many cases below the level charged by investment trusts.
Around half of investment trusts also still have performance fees and while it is encouraging to see some boards removing them, the cost advantage for many has been eroded.
That said I have never chosen investments purely on the basis of charges. I have held investment trusts in the past quite simply because some offer exposure to areas and managers not available in unit trusts.
I hold RIT Capital Partners in my SIPP, for example. It aims to grow investors' wealth over the long term, but protect capital in tougher stock market conditions. It is a global portfolio of equity funds, absolute return and credit funds, public and private companies, and real assets, with exposure to a range of currencies as well. The management team is highly experienced and there isn't a unit trust like it.
I also hold Artemis Alpha Trust, which is a specialised UK smaller companies fund with an emphasis on the oil and gas sector and a large number of unquoted investments.
While unit trust managers can hold some unquoted companies, the need to buy and sell stocks to match daily flows in and out of the fund means they are not the ideal vehicle for unquoted holdings, which are virtually impossible to buy and sell on a daily basis.
One advantage of investment trusts is they issue a fixed number of shares, so fund managers don't have daily flows of money in and out of the fund to deal with.
For many years I have also been investing monthly into Templeton Emerging Markets investment trust. It has suffered of late because of the sell-off in emerging markets.
As a result it is trading at a discount to net asset value of around 10 per cent, which essentially means you can buy £1 worth of assets for 90p. This might sound attractive if you are a buyer, but less so if you are a seller. The discount or premium to NAV is something investment trust investors need to be aware of.
Investment trusts have certainly made hay during the bull market of the past few years. The downside is there are fewer bargains to be found than a few years ago. More and more trusts are trading either at their NAV or at premiums.
Some of the infrastructure funds, for example, are trading on premiums of more than 10 per cent. They do offer a good income stream, but it is also an indication investors are buying into a fashionable area, which I often see as a warning sign. Most investment trusts don't stay at premiums for long and when premiums turn to discounts there is usually a capital loss.
Conversely, the best time to buy must be near the bottom of a bear market, where premiums will have all but disappeared and many trusts might be sporting discounts in excess of 20 per cent. This is where canny private investors could score a big win. That said, you need to be brave because as at that point in time the news will be all bad.
In conclusion I believe investors should try to make the most of both types of vehicle. Before you do, an understanding of the merits and disadvantages of each is vital to helping you make the right decision.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent