Professionals put a sleepy sector back on the map

INVESTMENT TRUSTS

BY JONATHAN DAVIS

There have been few more remarkable phenomena in the investment world than the startling revival of the investment trust as a vehicle for channelling both retail and institutional funds into UK and global stock markets.

As recently as 1980, the sector seemed to be "clutching its death warrant", says Robin Angus, of NatWest Securities, one of the few analysts to have followed the sector consistently since those days of relative oblivion, and still one of the most respected.

As well as trading at a substantial discount to their net asset values, many of those trusts that did exist were sleepy institutions whose methods today would be considered amateurish. The investment trust world was a cosy one that few outsiders knew much about.

Yet today things could not be more different. Not only has the number of trusts mushroomed, but they have become increasingly sophisticated. An increasing number are run by professional fund management groups, rather than by groups of individuals. Investment trusts account for 36 of the companies in the Footsie 350 index.

All this, concludes NatWest in a lengthy review of the sector published last week, has been mostly for the good. Investment trusts will continue to offer attractive homes for both retail and institutional funds.

The trend towards increasingly specialist trusts is also certain to continue. With a handful of exceptions, the day of the general trust, such as the long standing ones run by Foreign & Colonial and Alliance Trust, is over.

Nevertheless, not all is necessarily unalloyed good news in the sector, Mr Angus reckons. These days, the marketing people have the whip hand in the sector, the industry is increasingly production-oriented and "if it sells, it's good".

He worries whether this will lead to erosion in the standards of integrity shown by the sector. Reputations that have taken years to build could be threatened by corner-cutting and special deals.

For the retail investor, the worries include the increasing complexity of the capital structures now being created for trusts, and the very different risk characteristics that the sector now offers.

"I dread the idea that retail investors who think they are investing in a low-risk type of equity investment might get their fingers burnt through investing in the wrong trusts for them," says Mr Angus. He wants the industry to press ahead with the development and publication of risk ratings for trusts.

At the same time there is a need to educate independent financial advisers (IFAs) about what the trusts can and cannot do. "The key to the big-time in the retail investment world is to get the IFAs on one's side." While IFAs are increasingly interested in and knowledgeable about investment trusts, it is important they understand them properly before selling them to clients.

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