Money: Look for safety in numbers

A BEGINNER'S GUIDE TO INVESTING IN SHARES 'Collective' trust investment spreads risk but there are some pitfalls, warns Magnus Grimond

ANY SERIES of articles about investing in shares would not be complete without some mention of how to spread your risk by acquiring shares indirectly through investment and unit trusts. Both these "collective investment vehicles" and open-ended investment companies (Oeics), the ungainly hybrid introduced last year, are aimed squarely at the small investor. Indeed, unit trusts in particular have become the most popular way to invest in personal equity plans (PEPs), the tax-free investment "wrapper" that is being superseded by the new individual savings account (ISA) next year.

The principles behind collective investment are as simple and sound today as when Foreign & Colonial launched the first investment trust in 1868. Small investors whose savings are too modest to provide a reasonable spread of shares within a directly acquired portfolio - because of the costs involved and the insignificant size of the resulting holdings - can achieve the same end by pooling their money with other savers.

A management company like F&C or M&G can gather all these small savings together in a "trust" which then has substantial enough sums to invest directly and cheaply in shares, bonds or property. The trust structure offers the added advantage that it pays no capital gains tax (CGT), allowing it to trade its portfolio freely, where an individual with substantial profits on an investment might be deterred by tax considerations. (Investors are liable for CGT on any gains when they cash in their holding, however, unless they invest through a PEP).

Of course, the investor also hopes that a professional fund manager who dedicates most of his or her waking hours to the subject will also provide a superior service. Sadly this is not always so.

Figures from Micropal, a performance measurement company, show the extent of the disparity. A "unit holder" in one of the 159 unit trusts whose objective is to achieve capital growth from UK equities would have seen his or her savings rise by just short of 19 per cent on average last year. While not a bad result by most standards, Micropal says it would still have lagged the rise in the FT-SE All-Share index (the basket of 874 shares meant to be a representative sample of the whole market) by 4 percentage points. If you went into a unit trust to tap the wits of the best brains and outperform other investors, there is a better-than-even chance you would be disappointed.

The story is similar with investment trusts, which once had the edge on unit trusts in terms of cost and performance and because they could boost returns using borrowed money. Micropal shows that the best-performing of the 13 investment trusts seeking capital growth from UK shares, Fleming Enterprise, grew nearly 25 per cent on the year, well ahead of the market. But the worst - Welsh Industrial - would have lost you over pounds 30 for every pounds 1,000 invested.

There are several problems. Fees, particularly the typical 5 to 6 per cent initial fee when buying into a unit trust, are a drag on performance. Index-tracking funds, the increasingly popular trusts meant to do no more than match the rise or fall in the overall market, provide some illuminating lessons. To equal the All Share index to the middle of December, a tracker fund would have to have been up a little over 23 per cent. The best performer, Legal & General's UK index, with no initial charge, came close, but Morgan Grenfell's tracker fund, charging 5 per cent, could not even make it above 15 per cent last year. Investors paying initial fees of between 3 and 6 per cent and ending up with a markedly worse performance than the market should be asking their fund managers what they are up to.

Another problem with "collective" investment vehicles is that with 1,687 unit trusts and 350 investment trusts on the market, they are nearly as numerous as the shares they invest in. This means some are highly specialised, only investing in one industry or geographical area, which increases risks. Had you invested in the average trust specialising in the Far East last year, you would have lost about a third of your money. Had you gone into certain individual country funds you could be facing a loss of over 80 per cent.

Even so, carefully selected trusts (and, increasingly, Oeics) can be a useful way for more sophisticated investors to gain safer access to higher-growth areas. This applies in particular to the relatively new venture capital trusts (VCTs), which put investors into the high-risk area of venture capital while also gaining lucrative tax breaks.

For most people a low-cost tracker fund within a PEP was an excellent investment in 1997. These should probably be the preferred home for the low-risk part of most portfolios. More sophisticated investors can dabble in specialised funds, but beware - the risks can be substantial.

Investing for growth, p13-17

News
David Beckham
peopleFootballer joins No campaign
Sport
Angel Di Maria
Football
News
Piers Morgan tells Scots they might not have to suffer living on the same island as him if they vote ‘No’ to Scottish Independence
news
News
i100Exclusive interview with the British analyst who helped expose Bashar al-Assad's use of Sarin gas
PROMOTED VIDEO
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch star in the Alan Turing biopic The Imitation Game
film
Arts and Entertainment
Rob James-Collier, who plays under-butler Thomas Barrow, admitted to suffering sleepless nights over the Series 5 script
tv'Thomas comes right up to the abyss', says the actor
News
newsIn short, yes
Sport
Angel Di Maria celebrates his first goal for Manchester United against QPR
Football4-0 victory is team's first win under new manager Louis van Gaal
News
Denny Miller in 1959 remake of Tarzan, the Ape Man
people
Arts and Entertainment
Cheryl despairs during the arena auditions
tvX Factor review: Drama as Cheryl and Simon spar over girl band

Arts and Entertainment
art
Arts and Entertainment
Calvin Harris claimed the top spot in this week's single charts
music
Sport
BoxingVideo: The incident happened in the very same ring as Tyson-Holyfield II 17 years ago
News
ebooksAn unforgettable anthology of contemporary reportage
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

SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Senior BA - Insurance **URGENT**

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Training Coordinator / Resource Planner - City, London

£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...

Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)

£400 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...

Day In a Page

These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week
The fall of Rome? Cash-strapped Italy accused of selling its soul to the highest bidder

The fall of Rome?

Italy's fears that corporate-sponsored restoration projects will lead to the Disneyfication of its cultural heritage
Glasgow girl made good

Glasgow girl made good

Kelly Macdonald was a waitress when she made Trainspotting. Now she’s taking Manhattan
Sequins ahoy as Strictly Come Dancing takes to the floor once more

Sequins ahoy as Strictly takes to the floor once more

Judy Murray, Frankie Bridge and co paired with dance partners
Wearable trainers and other sporty looks

Wearable trainers and other sporty looks

Alexander Wang pumps it up at New York Fashion Week
The landscape of my imagination

The landscape of my imagination

Author Kate Mosse on the place that taught her to tell stories