Investment trusts: A good way to get into emerging markets

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The Independent Online
Investment trusts have a colourful past. They also offer the potential for building a portfolio in a wide variety of shares across the world. Tony Lyons guides through a Cook's Tour of the industry.

The history of investment trusts dates back to the 1860s, when a number of wealthy individuals formed a company to invest in bonds issued by the colonies and the USA. In 1868, this became Foreign & Colonial Investment Trust.

Another fund, Alliance Trust, was set up by a group of Dundee businessmen to buy a portfolio that consisted of mortgages made against land bought in the USA. Today, it still has more than 40 per cent of its pounds 1.4bn portfolio abroad.

While there are many investment trusts that offer just UK investments, most are known for their specialist talents in investing overseas. The largest fund, the pounds 1.8bn Foreign & Colonial, has just under 60 per cent of its portfolio abroad.

All the funds with overseas portfolios offer an easy and relatively cheap means of investing abroad. In fact, no matter where the investor looks on the globe, there is bound to be an investment trust offering a managed portfolio.

Investment trusts are close-ended funds. This means that they have a fixed number of shares in issue. This is unlike unit trusts, which are open-ended and so have to create and cancel units whenever investors buy and sell in large numbers.

Investment trust managers know how much they have to invest and can take a long-term view, especially in markets that are difficult for the private investor to trade in. This makes investment trusts the ideal way to invest in emerging markets.

"These are markets with little or poor liquidity," says Ernest Fenton, of the Association of Investment Trust Companies. "They need time to mature and settle down. Investment trusts look at the long-term horizon. They do not have pressure to chop and change holdings because of unit-holder pressure from buying or selling units."

The adventurous investor who wants more than just a tracker fund following the FTSE 100 index or a broadly based growth fund is bound to find a trust that will meet his needs. However, a word of warning - the more specialised a fund, the more volatile its share price is likely to be and the higher the risks associated with any investment.

The turbulent stock markets of the past couple of weeks have seen volatile investment trust prices. "Unlike unit trusts, which have their prices fixed at the end of the working day, investment trust prices move all the time depending on investor demand in the market," says Mr Fenton. "Ironically, investment trusts recover much quicker after a market downturn.

"While unit trusts are sometimes forced to sell their best holdings, because investment trusts are close-ended they do not have to tamper with their portfolios."

Investment trusts can invest in virtually any country and any of the main investment vehicles. There are even a couple of funds that specialise in property while BZW, Flemings and Mercury run trusts that invest in commodities and natural resources. Some management groups have long had a reputation for their expertise in emerging markets. But if a general emerging market fund is not satisfying enough, then there is a whole range of single-country and regional trusts.

Flemings, with its long association with the Far East, is well known for its Chinese and Indian funds as well as its more conventional range. If, despite recent market turmoil, you believe that Latin America, Eastern Europe or the Pacific Rim region will offer the best returnslong term, there is a fund available there too.

Some of the top-performing funds specialise in these markets, with the one of the best being Baring Emerging Europe trust, which specialises in the former Iron Curtain economies. But beware. Some of the worst performers over the past decade have been trusts specialising in Japan, Korea, Thailand and companies in the former East Germany.