New trusts face a shaky start

As the UK stock market is buffeted around on the back of Wall Street, attention is turning to Japan where launches look much more attractive

WITH just three weeks until the end of the tax year, fund management companies have been rushing new investment trusts on to the market in the hope of scooping up any remaining personal equity plan money.

Schroders, Perpetual and M&G have already attracted investments of more than pounds 300m between them. All three investment houses have solid track records that justify investors' faith in them. Chris Macdonald, managing director of London-based independent financial adviser Brooks Macdonald Gayer, says: "Virtually all of Schroders' trusts go to a premium straight away. If you are going to invest in them, it's best to get in at the beginning."

Likewise, Mr Macdonald believes that the M&G and Perpetual trusts will perform well. He says: "A large number of PEP investors are reinvesting the income back into the trust. This will automatically keep demand up for the shares."

But not all new trusts will get off to such a good start. For starters, the fund management company normally deducts the launch costs - typically 4.5 per cent of the amount invested - from investors' money. This means that for every pounds 1 you invest, only 95.5p goes towards buying investments.

Worse still, most trust shares go to an immediate discount compared to the value of the trust's underlying assets - the net asset value. This is usually because demand for the shares has been sated by the initial launch, and there are no new buyers on the market to push the share price up.

Fund managers have tried to compensate for this loss of value by giving free warrants to investors in a new launch. Warrants are a type of security which confers the right to buy additional shares at a fixed price on a specific date in the future.

But sadly nothing in life is free. Kean Seager, of Bristol-based independent financial adviser Whitechurch Securities, says: "When the warrant is exercised, the net asset value of the trust is diluted between more shares, and the share price falls to reflect that dilution."

Mr Seager says it makes better sense to buy trust shares that are already at a discount. If demand for a particular trust increases, its share price will rise and the discount will narrow.

"That way you can potentially benefit twice over - firstly from growth in the assets of the trust and secondly from the share price catching up with the actual value of the assets," he says. "Three or four years ago, many trusts had fallen to a discount of 20 per cent or more, but the average discount has now narrowed to about 7 per cent."

However, not all discounts will necessarily narrow. Mr Macdonald says popularity of the sector is crucial. He cites the US as an example: "The sector performed fantastically last year, but most US trusts are at a discount of 15 per cent or more. This is because investors think the market has peaked." Many investment advisers also believe the UK market is about to peak.

Japan, on the other hand, is the market that investors have been expecting to happen for several years. As a result, mostJapanese and Far Eastern trusts are trading at net asset value or at a premium, making new launches in these sectors look all the more attractive.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference
Rugby World Cup 2015: The tournament's forgotten XV

Forgotten XV of the rugby World Cup

Now the squads are out, Chris Hewett picks a side of stars who missed the cut
A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

Britain's Atlantis

Scientific study beneath North Sea could revolutionise how we see the past
The Queen has 'done and said nothing that anybody will remember,' says Starkey

The Queen has 'done and said nothing that anybody will remember'

David Starkey's assessment
Oliver Sacks said his life has been 'an enormous privilege and adventure'

'An enormous privilege and adventure'

Oliver Sacks writing about his life
'Gibraltar is British, and it is going to stay British forever'

'Gibraltar is British, and it is going to stay British forever'

The Rock's Chief Minister hits back at Spanish government's 'lies'
Britain is still addicted to 'dirty coal'

Britain still addicted to 'dirty' coal

Biggest energy suppliers are more dependent on fossil fuel than a decade ago