Special Report on Investment Trusts 1: Funds offer a menu to suit all tastes: Jason Nisse looks at the wide range of ways to make money, and the international scope, that this financial sector can offer

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The Independent Online
'IT'S VERY difficult to launch a plain vanilla investment trust in this market,' says Ben Siddons, chairman of Kleinwort Benson Investment Trust Management, a subsidiary of the merchant bank with a reputation for innovation.

Investors, argues Mr Siddons, are wary of the UK equity markets and should they want to invest in them, there is a plethora of general trusts available, covering all angles of the UK market. You can have high income, small companies, technology, growth companies and any flavour of investment in the UK market merely by buying shares in existing trusts.

Kleinwort's innovation is to bring to the private investor opportunities which he or she would not be able to exploit on a personal level. In June it launched the Endowment Policy Investment Trust, a pounds 30m trust with a life of 11 years, which buys up insurance companies' mortgage endowment policies at a discount and holds them until maturity.

There are two ways of buying endowment polices, either through intermediaries or at auctions.

The latter is risky but the former, for individual investors, is expensive because of the commission costs. Also, if the investor buys one or two endowment polices, and one of the mortgagees defaults, he or she will nurse a large loss.

Because Kleinwort is buying a large number of endowment policies it spreads the risks and cuts the commission costs of going through intermediaries. Mr Siddons reckons this is a market where it is important to be first because it is relatively illiquid and too many entrants will push the price against you.

Kleinwort is planning another trust in the near future which will take advantage of an illiquid market, though Mr Siddons does not want to say what it is because he might alert rivals.

Overseas markets may not be as crowded as the UK, but there is a wide choice of investment instrument for Europe, the US, Japan, Australia and general Asian funds.

However, there are some waters which are relatively uncharted, and these provide some of the most exciting investment areas.

Nigel Sidebottom, investment trust analyst at Gerard Vivian Gray, has spent a large amount of time researching some of the more unusual specialist trusts.

He notes that in some areas, where the market has fallen and there is not a great deal of analysis, the value of the investment trusts investing in the market has dropped even further than the market. This means that the trusts are trading at a substantial discount to the net asset value (NAV) of their portfolios, and if the markets improve, there is a potential double benefit for the investor.

The investment trust companies can truly be said to cover the globe. Fleming's consider there are 135 countries in the world which it would consider as emerging markets, for the purposes of its Emerging Markets trust. Of those, however, no more than a third actually have stockmarkets. But should the investor want to invest in Sri Lanka or Greece, he or she will be a able to find a trust that satisfies.

Two markets Mr Sidebottom particularly likes are Korea and Malaysia. For instance, Schroders has a quite subtantial fund, standing at dollars 100m, called the Korea Europe Fund. Having traded at a premium of 50 per cent to NAV last year, it collapsed and now stands at a discount of around 20 per cent.

Another is the Malaysia Equity Fund, where the discount to NAV has narrowed recently but has stood in the past at over 40 per cent.

A third market where there are subtantial discounts is Chile, where there are four investment trusts, including ones managed by GT Management and Five Arrows. Mr Sidebottom says it would take a brave investor to step into the Chilean market, as there are particlular problems about realising profits on investments.

The Chilean market came into vogue with the return to democracy after the years of dictatorship under General Pinochet. It is a partucularly attractive market as the country appears at least as financially stable as any in Latin America.

However, a complex set of rules requiring investment profits to be reinvested in Chile for up to five years warns off some investment companies.

Chile is not the only market in Latin America which appears attractive from the outside but has hidden dangers. Latin American Securities, the firm part owned by Foreign & Colonial which specialises in South Amercian investment, is keen on Peru, but would be loath to invest heavily in the market because of a lack of liquidity.

It has two investment trusts which invest in Latin America, a general trust and one which invests in small and medium sized companies in Brazil. In addition it has a closed-end unit trust which invests in Latin American debt instruments - often buying discounted country debt on a secondary bank market - and four open ended country funds - Argentinian, Brazilian, Mexican and Colombian - and a general open ended fund.

Last year the performance of these funds was spectacular, but what could be best decribed as a market correction in some of the major markets at the middle of this year left a lot of investors quite wary about Latin America, and underlined that many single country investment trusts are risky and might be better left to the professional investor.

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