At the end of the 1970s, the investment trust industry seemed to be dying on its feet. It had become the preserve of institutional investors, but even they had only a modest appetite for investment trusts. This meant trust shares were bought and sold for substantially less than the net asset value of their underlying investments - their "real" value.
Thanks largely to the introduction of savings schemes, interest in trusts has reawoken. Private investors have just piled hundreds of millions of pounds into three big investment trust issues from Schroders, M&G and Perpetual. The leading investment trust managers are now competing to offer vehicles to pay off your mortgage or help you save for your pension.
Should you consider investment trusts for your savings? Unless you are particularly wary of stock-market investments, the answer is probably yes. Although investment trusts are stock-market companies in their own right, they have much in common with other collective investment vehicles such as unit trusts and life insurance savings plans. Investors' money is pooled into a single fund which is used to buy a portfolio of perhaps 40 or 50 shares in other companies. This allows small investors to spread their risk between many companies.
The table shows the performance of UK general and international investment trusts over the past three and five years. These two sub-sectors are the obvious starting points for many first-time trust investors as they are less risky than specialist or single-country funds. Over both periods, the best-performing funds have done very well. You would have comfortably doubled your money by investing in Finsbury Trust over the past three years, and you would have trebled your money if you had had shares in Personal Assets or Law Debenture Corporation over the past five.
The table also illustrates the risks of investing in shares, and therefore investment trusts. Holding units in Murray Split Capital produced a return of little more than 11 per cent in three years. M&G Recovery, backed by thousands of private investors, rose by only 27 per cent.
Note, however, that over five years, the growth of even the worst-performing trusts is much more respectable - 85 per cent from Scottish American and 74 per cent from Edinburgh Investment. This goes some way to making the point that investment trusts should be regarded as long-term investments.
One claim often made is that investment trusts offer private investors lower management charges than other forms of "retail" investment. While this is generally true compared with life insurance savings plans, the comparison with unit trusts is less clear-cut because of the different ways in which management fees are charged. Many big investment trusts are efficient, but the management fees of some small trusts investing overseas are much more costly, as are those on many newly launched funds.
Fund managers claim that having a fixed number of shares makes investment trusts easier to manage than unit trusts, whichhave a varying number of units. This can be particularly important in a sharply falling market, when a unit trust may be forced to sell its best investments to meet unit holder redemptions.
In general, investment trusts have performed better than unit trusts over the past 10 years, though the differences over the past five years are more marginal. The main reason for this outperformance has been the narrowing of the discounts between share prices and net asset values. This process was greatly encouraged by the heavy buying of shares by private investors through savings schemes. These are often run "at cost" by the management companies and are usually the cheapest way of buying investment trust shares.
Discounts are perhaps the least understood aspect of investment trusts. For example, many of those who backed the recent launch of the M&G Equity trust would probably have been just as well served by buying units in M&G Income. M&G Income is cheaper, because its units are trading at an 8 per cent discount. In other words, 100p invested in M&G Income would buy nearly 109p of underlying assets, or investments.
Craig Walton, marketing director at Foreign & Colonial, said new trusts may be "a good buy, [but] not the best buy". Similarly, Simon White, managing director of Kleinwort Benson's investment funds arm, said new trusts may not represent the ideal or lowest-cost investment, but it is better to invest in them than not to save at all.
These are the arguments that the life insurance industry used to use to justify its expensive policies. Trust managers rightly say that buying trusts at a discount is an essentially speculative business and that most private investors are uninterested in such technicalities. None the less, financial advisers could be expected to think twice before recommending the latest "me too" trust launch. Patrick Gifford, chairman of Fleming Investment Trust Management, concedes: "The industry has not been as effective as it could have been or should have been in encouraging really effective discount buying."
The renewed interest in investment trusts has allowed managers to raise huge amounts of new money. They raised nearly pounds 4bn in 1994, more than twice as much as in 1993. The number of investment trusts has almost doubled to about 350 since the start of the decade.
Best and worst-performing investment trusts*
International general Growth over Growth over
funds 3 years (%) 5 years (%)
Law Debenture 88 206
Bankers 62 167
Personal Assets 58 214
Brunner 57 109
Foreign & Colonial 53 122
Average 50 120
Second Alliance 41 109
Baring Tribune 41 91
Mid Wynd International 40 95
Alliance 36 100
Scottish American 27 85
UK general funds
Finsbury Trust 123 146
Mercury Keystone 91 146
Finsbury Growth 66 155
Fleming Claverhouse 42 95
Edinburgh Investment 41 73
Average 50 110
Malvern UK Index 39 83
Govett Strategic 37 94
Albany 30 91
M&G Recovery (Units) 27 -
Murray Split Capital (Units) 11 -
* Five best and worst-performing investment trusts among peer group over the past three years and how they have done over five years Source: HSW