It's time to consider an unpopular option

Investment trusts are out of favour but good value, writes Tony Lyons

Investment trusts had a rough ride in 1998 but if you are looking for a long-term home for your last PEP or new ISA money, these stock market funds are a good bet. They have been held back from mass popularity because they are more complicated than their near-rival, unit trusts, and have also suffered because they don't pay much (or any) commission to financial advisers. An IFA who depends on commission to make a living is unlikely to suggest an investment trust in preference to a unit trust.

But it is precisely this complexity and low-cost structure that makes investment trusts an excellent home for long-term savings.

Investment trusts are companies listed on the stock market. They are run by boards of directors and have a set number of shares which are traded on the market (unlike unit trusts which create and cancel units as people buy and sell them).

The share price of an investment trust is determined by demand in the stock market. Prices are often below the value of the underlying company shares held in the trust, which means the trust is trading "at a discount".

The average discount is currently around 14 per cent, which means the investor can buy pounds 1 of shares for 86p. Not only that, but the dividends paid out will be based on the full pounds 1. And once the new financial year starts on 6 April, investment trusts will be able to arrange buy-backs for their shares.

The changes in advanced corporation tax (ACT) rules which come into force on that date may hit share dividends, but they have also freed the way for investment trust managers to purchase their own shares in the market. This could revitalise the industry, as it will reduce the over-supply of shares.

When the buy-backs start, investment trust share prices are bound to rise. Flemings, one of the largest management groups, is typical in that on 6 April all of its funds will be able to initiate buy-backs. In addition, the price of an investment trust can be spiced up by takeover rumours. There are a number of predators in the market.

Most investment trust PEPs have no initial charge - only the 0.5 per cent stamp duty paid on all purchases of ordinary shares - and the annual management charge is usually between 0.25 and 1 per cent. PEPs sometimes have an annual administration charge, starting at pounds 10 but usually around pounds 30 per fund. Compare this with actively managed unit trusts which usually have a 5 per cent initial charge and annual charges of around 1.5 per cent. A few even have extra administration fees.

Unlike unit trusts, investment trusts can invest in property and unquoted companies. They can even borrow money - this is called gearing. Managers will do this if they believe they can get a good return. "Investment trusts have so much going for them," says Simon Crinagh of Flemings, which has dropped its 1.5 per cent initial PEP charge for new investors. "Claverhouse, which invests in blue-chip shares, has been popular and is at a slight premium. Fleming Geared Growth trades at a 21 per cent discount."

For first-time investors, Simon Westwood of Henderson recommends a look at his stable's Witan and Electric & General Trusts. "These are long-established, consistent performers investing in blue chips. A bigger gamble could be Bankers, which follows an out-of-favour value in-vestment style, so it is on a large discount."

Investors happy to take a higher risk could look at smaller company funds, advises Jeremy Tigue, of Foreign & Colonial, while safety-first investors should look at the broad international trusts.

Most investors buy their investment trust PEPs directly from the managers. Some trusts pay commission and you can save this by buying through discount brokers.

If you want to find out more about investment trust PEPs, the Association of Investment Trust Companies has free fact sheets.

n Contacts: Association of Investment Trust Companies, 0171-431 5222; Fleming Investment Trust Management, 0500 500324; Foreign & Colonial, 0171-825 5300; Henderson, 0800 212256; Kohn Cougar, 0117-946 6384.

RECOMMENDED TRUSTS

Roddy Kohn, of Kohn Cougar, is a fee-charging IFA . He particularly likes:

n Witan: "a good middle-of-the-road trust with long experience in international markets".

n Henderson TR Property: "buys property shares as well as taking direct stakes in property - something a unit trust cannot do".

n Henderson Strata: "a smaller company specialist".

n Gartmore European and Gartmore Smaller Companies: "good performers".

n F&C Enterprise: "invests in unquoted companies and has the best long performance record of all funds".

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
tech
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
life
News
i100
Life and Style
tech
Voices
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Recruitment Genius: Administrator - IFA Based

£22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions