Which figures to believe?

HYPING the merits of investment trusts as "the oldest and still the cheapest form of collective investment", the Association of Investment Trust Companies claimed that over 20 years the best investment trust had out-performed the best endowment policy by a "startling" 240 per cent.

But as the AITC admitted, its figures were based on a limited sample of investment trusts and allowed for tax-free growth (as if held within a PEP) for a full 10 ,15 and 20 years, although tax-free plans have been available only since 1987.

Latest five-year statistics from Micropal appear to give a broader picture, ranging from a 292 per cent gain for MCIT Capital (2001) as top performer and a 265 per cent gain for Manakin Holdings, to losses from 80 to 94 per cent for trusts including First Spanish, Gresham House and American Gas Warrants.

So is it possible to pick the wrong investment trust and lose nearly all your money in five years? Only if you look at the wrong statistics, says Lewis Aaron, an investment trust analyst with S G Warburg Securities.

"Micropal have no idea what they are talking about with closed-end funds like investment trusts," he said. "They have no way of dealing with capital distributions. First Spanish had a capital reconstruction - investors didn't lose 80 per cent of their money, they had it given to them in another share."

Warburg, like other brokers specialising in investment trusts, tracks the total return on investment trusts, as well as changes in net asset values and discounts. Micropal's performance statistics are based on share prices only, plus reinvestment of net income.

Paul Barnes at Micropal said this method met a deliberately limited objective and was not a failed attempt to carry over a procedure used with open- ended unit trust statistics.

"All we are doing is illustrating the return on a mid-market price basis for each security - it doesn't go any further."

He added that advisers using his firm's statistics knew enough about the complexity of investment trusts not to base recommendations on performance figures alone.

Fiona Monro at the AITC agreed that advisers were usually conscientious in probing beyond statistics: "They do have a built-in bias against investment trusts - they know they are rather odd," she said.

Ms Monro noted a further limitation of some trusts at both ends of the performance tables: ''They are quoted and in theory you could buy and sell them, but in practice it would probably be very difficult,'' she said.

She offered the example of Manakin Holdings. This company began voluntary liquidation in October 1991, and the liquidator forecast in 1992 that the process would take another two to three years.

"The share price has gone up, yes, " said Ms Monro, "but all the investments are being sold off, so shareholders know they are going to get cash in a relatively short period."

She added that the shares in Manakin were also very tightly held. As at 12 May, 37.5 per cent of shares were held by large institutional investors including Equitable Life, Philips Pension Fund, Postel and Sun Life.

Investment trusts v endowment funds

This table compares the average and best-performing investment trusts and endowment funds on the following basis:

Contribution over 10 years pounds 35 a month

Contribution over 15 years pounds 30 a month

Contribution over 20 years pounds 25 a month

Average performance

10 year 15 year 20 year

Endowment pounds 7,041 pounds 14,473 pounds 25,991

Investment trust pounds 8,081 pounds 21,471 pounds 49,584

Best performance

10 year 15 year 20 year

Endowment pounds 7,999 pounds 16,845 pounds 29,655

Investment trust pounds 12,221 pounds 37,851 pounds 101,982

Investment trust figures include a bid/offer spread and gross dividends have been reinvested in order to stimulate a Personal Equity Plan. The investment trust sample chosen was the International and UK General, Capital Growth and Income Growth categories, which includes all the major 'flagships'. Figures correct as at 31 March for investment trusts and 1 April for endowments.

Source: Association of Investment Trust Companies/Financial Product Review