Mark Dampier: Safe stop in investment trusts has plenty of zip
Friday 11 October 2013
The debate surrounding unit trusts and investment trusts, and which is the superior investment vehicle, has raged throughout my whole career.
In most respects I haven't found the debate helpful. I believe investors should concentrate on taking the best from both.
The fact investment trusts can use gearing – borrowing money to invest – is usually an advantage over the long term. In rising markets it explains, at least in part, their better performance over unit trusts. Investors need to be aware though that performance can be driven by one-off factors, such as discounts narrowing; or even the share price moving ahead of the net asset value for the fund to trade at a "premium", to use a popular piece of investment-trust jargon.
Investment trusts are listed companies, making them slightly more complex than unit trusts. This shouldn't necessarily put investors off. Unit trusts, on the other hand, are said to be more expensive. I would argue after the ending of commission that unit trusts will be cheaper than investment trusts. Remember too, some 62 per cent of investment trusts have performance fees, which can increase costs.
Those wanting to "dip a toe in the water" for the first time, could go out and buy Foreign and Colonial, Witan or a number of other good global investment trusts. Alternatively, you could leave it to an expert such as Peter Walls, who manages the Unicorn Mastertrust. Mr Walls has more experience than most when it comes to investment trusts. He started his career at Hoare Govett in 1976 and what he doesn't know about investment trusts you could write on a postage stamp.
Mr Walls combines an overall view of stock markets and the economy with his experience of individual investment trusts. His economic analysis often centres on capital flows into particular countries or regions. Looking at where investors are deploying cash gives him a broad sense of momentum. This is important because areas can suddenly become very fashionable.
At the individual trust level he looks at underlying portfolios, seeking those that offer good earnings per share growth and are investing in the next growth markets. Often in the investment trust world this can be done simply by looking at discounts and premiums. While discounts can indicate a poorly managed trust, they can also mean a deeply unfashionable and unloved sector – normally an excellent buying opportunity.
Conversely, when funds and sectors are trading at big premiums it is usually a signal markets are "overcooked". One area Mr Walls and I think looks stretched is the income space, or more specifically the alternatives for income space. Here we find infrastructure funds, often trading at 10 per cent plus premiums, still being promoted on the basis of a 5 per cent yield. These sorts of trusts are also raising lots of new money and this is a sector that he is tending to avoid right now.
Presently, Mr Walls has no strong views on stock markets and if anything he feels slightly cautious. He has therefore bought funds he feels offer downside protection. He cites Foreign & Colonial as an example. It is a large, liquid trust where he knows the company will buy back shares if the discount exceeds 10 per cent.
Investment trusts often get wonderful publicity from the financial media, but the sector has a marvellous ability to shoot itself in the foot as we saw in the emerging markets bull run of the 1990s and more recently in property, where the sector has gone from hero to zero and back in just a few years.
This fund has a remarkable performance track record, yet it is still only £10m in size. In many ways this is ideal for investment trusts where liquidity can be a major problem. Mr Walls believes the fund is more than capable of growing to a size of around £100m, but after more than a decade of excellent performance it still sits there at £10m. In my view this could make an ideal, one-stop shop for investors looking for some investment-trust exposure, with an experienced fund manager who knows his sector inside out choosing funds on your behalf.
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
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Russell Brand accuses FOX News anchor Sean Hannity of terrorism after aggressive Israel-Gaza debate
- 2 Pope Francis issues top 10 tips for happiness – including don’t try to convert other people
- 3 Arturo Vidal to Manchester United: Midfielder set to force through move to Louis van Gaal's Red Devils - reports
- 4 Disney heiress Abigail disowns her share of family profits in West Bank company
- 5 Israel's propaganda machine is finally starting to misfire
The secret report that helps Israel hide facts
Land for gas: Merkel and Putin discussed secret deal could end Ukraine crisis
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
A day in the life of Vladimir Putin: The dictator in his labyrinth
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
- < Previous
- Next >
iJobs Money & Business
£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...
£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...
Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...
£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...
Day In a Page
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000