Secrets of Success: Get ahead by ignoring the crowd

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The Independent Online

The recent figures on savings flows in the UK make for interesting reading and may also provide pointers to where best to put your money to work, starting from the usual contrary premise that the one place you do not want to be is where everyone else is putting their money.

The recent figures on savings flows in the UK make for interesting reading and may also provide pointers to where best to put your money to work, starting from the usual contrary premise that the one place you do not want to be is where everyone else is putting their money.

You may have noticed the impressive figures from National Savings & Investments this week, which showed a big increase on sales of many of its products, including a big rise in the number of savers putting their money into Premium Bonds, where the overall payout ratio was recently raised to 3.2 per cent. As interest rates rise, most savers are naturally drawn towards interest-bearing products with guaranteed returns, while the random element involved in buying premium bonds seems also still to appeal to many.

Meanwhile, net sales of unit trusts and investment trusts have cratered so far this year. The story here is two-sided: while gross sales of funds are only down by some 15 per cent year on year, there has been a huge increase in redemptions. In other words, people are also taking money out of existing funds, either for reinvestment or out of disillusionment with their recent performance. It does not help, perhaps, that the biggest-selling sector of late has been corporate bonds, even though they are not a place you would wish to be at the moment.

Meanwhile, as predicted here and elsewhere, the returns from hedge funds, which have been the great marketing success of the past three years, have continued to disappoint. In aggregate, hedge funds made virtually no return at all in the first seven months of the year.

The combination of rising interest rates, poor returns from the stock market and worries that the house-price boom may be over are all tempting investors to look around for something new. Anything with a guaranteed yield in an environment of rising interest rates tends to look attractive.

One area that might now be worth a look is investment trusts, which have generally had a poor time of it of late, but where some relative bargains are appearing, as discounts to net asset value have widened. The point about investment trusts is that they require a bit more work to understand, because of the complexities of the discounts at which most trade, but they can repay the effort. When discounts widen to what are historically large numbers, it can provide a good opportunity to rebalance or extend your portfolio with some astute trading.

Some of the big generalist investment trusts, such as Foreign & Colonial and Alliance Trust, had their discounts widen to nearly 20 per cent earlier this year, though they have now come in to 15-16 per cent, with debt valued at book value. Although their returns will never be exciting, it often makes sense to sell a disappointing or expensive general equity unit trust, and swap into a generalist trust on a wide discount, to take advantage of their lower costs and the potential for a pick-up through a fall in the discount.

A weak market often also provides an opportunity to buy into one or two small but highly regarded trusts that typically sell at a premium, such as Personal Asset or the Independent Investment Trust, more cheaply than normally possible.

A recent note from the brokers at Close Winterflood Securities highlights the attractions of investment trust tracker funds, a tiny but interesting sub-section of the investment trust sector. There are only five investment trust tracker funds, and two of those are small-company tracker funds, themselves an interesting concept that you will struggle to find in the unit-trust universe: running a small-company tracker fund in a unit trust is logistically a nightmare because of the need to handle inflows and outflows, something that closed-end funds such as investment trusts do not have to endure. What Close Winterflood shows is that the small-company tracker fund investment trusts have actually tracked the smaller company index better than the actively managed funds which set out to do the same - and their costs are lower. Of the three mainstream tracker investment trusts, two track the UK market and one the US market. Their annual running costs are lower than the typical unit-trust tracker fund. The Edinburgh US tracker fund has an exceptionally low total expense ratio of 0.34 per cent, though you do have to pay stamp duty of 0.5 per cent and negotiate the bid-offer spread as an entry cost when you buy an investment trust.

Stand by in the next few weeks for a flood of venture capital offerings from fund-management companies looking to cash in on the more generous tax breaks for Venture Capital Trusts announced in this year's Budget. The tax benefits of these funds are actually very generous, so good in fact as to be impossible to ignore.

I hope to write about this subject again next week, but suffice it to say that aggregate returns from the wave of new funds will surely be poor, as there is clearly not enough good opportunities in the AIM/fledgling company arena (where VCTs have to invest) to absorb all the money that will be thrown at them in the wave of launches that is coming.

Nevertheless there are some good companies with proven expertise in this area among those being launched and the rewards for those, especially higher-rate taxpayers, who can find their way to the best funds will certainly be worth the effort.

jd@intelligent-investor.co.uk

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