Investment Trusts: Funds take share of success: Buoyant industry proves a flexible friend for long-term financial planning, writes Alison Eadie

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The Independent Online
THE INVESTMENT trust industry is in buoyant mood. New issues are still being launched, although not quite at the hectic pace of the beginning of the year. Shares prices for the sector are at an average 6 per cent discount to net assets, still a historically narrow discount after a record 3.9 per cent in February, according to NatWest Securities.

The size of the industry is steadily growing, with total assets at the beginning of September of pounds 47bn against pounds 38.3bn in December last year, according to the Association of Investment Trust Companies, which represents 93 per cent of the industry by value and volume.

The popularity of regular savings schemes with private investors explains some of the growth. Contributions were pounds 122.1m in the first half of the year, a rise of 20 per cent on the first six months of 1993.

Ernest Fenton, director general of the AITC, said: 'Regular savings schemes are an excellent vehicle for long-term financial planning, including mortgage repayment and school fees. We are already seeing moves by the industry towards packaging investment trusts in a way that will allow investors greater choice and flexibility.'

The number of trusts and managers is rising as newcomers enter the field, particularly from companies that previously confined themselves to unit trusts.

Prolific, which has a strong 20-year track record in UK income unit trusts, has this month launched its first investment trust, also concentrating on UK equity income.

Mike Vogel, chief executive and investment director, said Prolific was persuaded to cross into investment trust territory by independent financial advisers who liked the product and philosophy of Prolific's unit trusts but preferred the vehicle of an investment trust. Stockbrokers in particular, he said, prefer closed end, quoted investment trusts to open-ended, non-quoted unit trusts.

Despite growing retail demand, the investment trust industry wants its position improved on the regulatory front. In particular, the AITC wants a reversal of an Inland Revenue ruling, effective from 6 April last year, which stipulated that personal equity plan investments could only be made in non-qualifying investment trusts holding at least 50 per cent of assets in ordinary shares.

Under Pep rules, up to pounds 1,500 a year can be put into a non-qualifying investment or unit trust. They are designated non-qualifying because more than 50 per cent of their assets are invested outside the European Union.

The April 1993 ruling was aimed to stop funds investing wholly in gilts or bonds from being non-qualifying, but has caught more in the net. High income funds investing in convertibles and venture capital investment trusts with a high content of loan stock now fall foul of the 50 per cent ordinary shares rule.

3i,whose recent flotation made it the largest investment trust and a constituent of the FTSE100 index, is particularly aggrieved that it does not qualify for full Pep status.

Charles Richardson, director of corporate affairs, said: 'We are putting money into British industry, via unquoted companies, which was the whole point of Peps. As an FTSE-100 company we are not a risky share, yet we are not 'Peppable'.'

Emerging markets investment trusts have also had to withdraw as non-qualifying Peps, due to a difference of opinion between the Revenue and the Securities and Investments Board over the definition of a recognised stock exchange. Fund managers had been investing according to the SIB list only to discover the Revenue list was less extensive. Foreign & Colonial and Templeton have withdrawn their emerging markets investment trusts from Pep selections until an agreement is reached.

Hamish Buchan, investment trust specialist at NatWest Securities, believes the present buoyancy in the industry is sustainable. Although the recent rise in interest rates could nudge investors back towards banks and building societies, he feels it would need a serious crack in the attitude to equities to push the average discount to net assets back into double figures.

(Photograph omitted)

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