Selling investment trusts

I rather enjoy receiving responses to this column. It shows that someone is at least reading what I write. A recent column prompted the newly incumbent PR lady of the Association of Investment Trust Companies (AITC) to corner me at a dinner. The upshot was an invitation to lunch with the director-general of this trade body to discuss the image of investment trusts. Unfortunately, Michael Hart's letter to me arrived on the same day as the announcement of his resignation.

It is worth remembering why investment trusts were established in the first place. The oldest in existence, Foreign & Colonial, is actually the trust which Mr Hart ran - and most successfully too. It was originally formed as an investment company which did not invest in equities. The process of transformation into the equity-based, actively-managed fund that is typical today was gradual.

Some investment trusts started their life as vehicles to finance entrepreneurial ventures in the developing world. Railways and South America both featured as investment projects. But they became more staid and, anyway, along came unit trusts with their greater flexibility and sales-led culture.

Traditionally, investment trusts have endeavoured to defend their corner against unit trusts on the basis of superior performance. In this, Mr Hart took a tried and tested line, but it is arguable that it is irrelevant now. Investment trusts, as I have mentioned before, have the advantage of lower charges, a fixed capital - with no inflows and no outflows of cash with which to cope - and the ability to borrow to enhance portfolio performance.

Yet, if you are an investor, the fact that the underlying assets may have done rather better than a comparable unit trust is of little comfort if the cash value of your investment has performed less well. When discounts widen, this is precisely what happens.

Some in the industry believe the AITC should be promoting more vigorously those aspects of investment trusts that are not so readily available through unitised vehicles, such as the ability to invest in unquoted situations. The illiquidity that the absence of a market for shares creates makes unlisted and smaller stocks generally unsuited for unit trusts, whereas an investment trust can take a longer view. Witness the way 3i and Electra have delivered impressive returns to their shareholders.

As before, I wish the movement well. Whoever takes over the hot seat would be best advised to emphasise the positive differences these trusts enjoy and reflect on the fact that the day of the traditional, general trust may have passed.

A new tax year - new opportunities. From Monday we can take out our 1998/99 PEPs, add another year's subscription to our Tessas - or take out a new one - and take profits on shares, comfortable in the knowledge that any tax will not be payable for nigh on two years. Both these tax- efficient investments look a must for investment capital. You would be amazed how much of the PEP and Tessa buying power is concentrated at the end of the tax year. Why not act early this year, beat the crowd and gain a full-year's tax benefit?

Brian Tora is chairman of the investment strategy committee at Greig Middleton.

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