Special Report on Investment Trusts 7: Saved by PEPs and the great British public: Prompted by the fear of corporate raiders and the benefits of new legislation, investment trusts are again seeking private investors, writes Rupert Bruce

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The Independent Online
MORE than 100 years after the first investment trusts were set up as vehicles for the British public to invest in North American railroads, they are again looking to the private investor.

Following the early days, investment trusts became popular with institutional investors such as pension funds, and neglected private investors. But during the last 20 years institutions have expanded their in-house investment management departments and no longer need to buy investment trusts.

So investment trusts have returned to their roots and sought to redress the balance between their institutional and public shareholders. They have been made more accessible to the public through the use of savings schemes and Personal Equity Plans (PEPs).

Fleming Investment Trust Management, whose forefather - The First Scottish Investment Trust - was set up in 1873, established one of the first savings schemes in 1985. PEPs followed later as legislation allowed.

Simon Crinage, marketing manager of Fleming Investment Trust Management, said: 'There was a problem because, basically, the only way you could buy investment trusts in those days was through a stockbroker. That was all very well if you had considerable assets. But if you wanted pounds 500 or pounds 1,000 of shares the commission was quite considerable.

'What we thought was that there should be a cheap and economic way of buying investment trusts.'

But the investment trust managers were not motivated by altruism alone. As institutional demand for trusts declined, so they became vulnerable to hostile takeovers.

Most trusts saw a wide discount open up between the net value of their assets and their stockmarket capitalisation. Corporate raiders soon realised that there was a killing to be made by taking over a trust and selling off its assets at a premium.

Some of Britain's largest investment trusts fell to predators in the mid- 1980s, and their managers must have realised that their livelihoods were in danger. Persuading the public to invest again would make them less vulnerable in two ways: the discount would be narrowed and the shareholders' base would become more loyal.

According to the Association of Investment Trust Companies, a trade association, the amount of money invested through savings schemes has grown from pounds 871,000 in 1985 to pounds 119.5m last year.

Apart from being a cheap way of accessing investment trusts, investing regularly through a savings scheme has the invaluable advantage of an effect dubbed 'pound cost averaging'. Mr Crinage said: 'Investing this way guarantees that your average cost per share will be lower than the average of the prices paid because you basically buy more shares when prices are low but fewer shares when prices are high.'

The 34 savings schemes available all offer investors the choice of making regular monthly savings or investing lump sums at will. The minimum monthly investments start at pounds 20 and go up to pounds 100, while the minimum lump sums start at pounds 250 and go up to pounds 2,000.

When choosing a savings scheme it is important to look at the investment record of the underlying investment trust, but also to consider the charges. These vary from nothing in the case of Dunedin Fund Managers to an initial charge of between 3 and 4 per cent at Fidelity Investments International.

Another consideration should be whether you can save into a PEP. The Chancellor of the Exchequer boosted the appeal of investment trusts in the last Budget when he doubled the sum of PEP money that could be invested in a trust without incurring tax to pounds 6,000.

This rule only applies, though, to 'qualifying' investment trusts with 50 per cent or more of their assets invested in the UK or another European Community country. Only pounds 1,500 can be invested through a PEP into trusts which do not qualify.

But investment trusts became successful before the Chancellor's move. M&G took pounds 244m of PEP money into two new investment trusts launched in October 1991 and March 1992. It had exploited an anomaly in the rule which, at that time, allowed pounds 6,000 to be invested in an investment trust through a PEP only at the time of launch.

In response to the more liberal post- Budget rules, there are now 24 different PEP schemes with access to 69 different investment trusts, compared with 16 schemes covering 51 trusts this time last year.

When investing through a PEP it is worth considering both how large the charges are and whether the PEP plan restricts you to just that investment trust management company's investment trusts.

Charges vary enormously. Among the most expensive is Gartmore Investment Managers' PEP which covers the Scottish National Investment Trust. It charges an initial fee of 5 per cent and an annual management fee of 1.5 per cent. There is also a dealing commission of up to 0.75 per cent.

At the other end of the scale is Alliance Trust Savings, where there are no management fees and a dealing commission of only 0.15 per cent.

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