Personal finance: A loss of trusts

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The Independent Online
I have a soft spot for investment trusts. It goes back more than a quarter of a century to when I ran what, I believe, was the first discretionary investment trust management service. The idea was simple. We researched the trust market. When people wanted us to look after sums of money that were insufficient, in our view, to provide an adequate spread of risk through individual shares investment, trusts provided a spread. What could be simpler?

If ever there was a case of A for effort, F for achievement, this was it. The fault did not lie in the concept. After a flying start, the portfolios were taken apart by widening discounts that emerged during the mid-1970s. There you have the problem. The shares of investment trusts are quoted on the stock market like any other company. No demand, and the shares fall, regardless of the performance of the underlying assets.

This fundamental weakness is, paradoxically, their great strength. They are limited companies with a defined share capital, able to borrow to enhance shareholder return. A fixed share capital means they do not have to cope with daily inflows and outflows of money as with unit trusts, which usually means their management charges are lower. And you can often buy the shares at a discount to the value of the assets, giving you more bang for your bucks.

When crash of 1974 drove discounts to levels never before plumbed, investment trusts suffered badly. Corporate predators stepped in to vacuum up underperforming funds. And one or two smart operators found buying a trust a cheap and convenient way of launching a rights issue.

Needless to say, the economic cycle took over. Trusts' management teams became sharper. Fixed redemption dates were introduced so initial investors knew when they would get their money back. A new golden age had dawned. So, why has it all gone pear shaped again?

The answer in part lies in the dwindling importance of investment trusts in the scheme of money management. There are FTSE 100 companies with values as great as the entire trust movement. Unit trusts, very much a parvenu, are worth nearly three times the value of investment trusts. And we now have Oeics coming along on the outside.

You can tell how managers are rated by the valuations accorded to the trusts. Henderson Investors' Michael Moule has long been highly regarded, but even the Bankers Trusts, which he manages, stands at a 7 per cent discount to asset value.

I retain my affection for investment trusts and even hold a few myself. But there are plenty of young managers who now eschew them in favour of unit trusts, pointing to poor liquidity and indifferent performance as a reason to adhere to what they see as a tried and tested formula. How are the mighty fallen!

Brian Tora is chairman of the Greig Middleton Investment Strategy Committee.

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