Investment trusts v Unit trusts

No. It used to be that investment trust underperformed the market. Presumably they move in a cycle that is offsest from the whole market as over the long-term they really ought to be the same.

tim

Unit trusts are always valued at the market price of the underlying investments. Investment trusts are traded on the stock exchange and may trade at a discount to their net value or at a premium.

Recently the discounts have been narrowing, in part due to buy-back programmes, and also due to changes in the way the portfolios are managed. This means that the ITs have outperformed the market indices. Another factor is that institutions (Lifecos, pension funds) have been getting rid of their IT holdings in favour of fixed interest stocks at the behest of the FSA. This led to widening of the discounts, and since the switch is now virtually complete, the discounts are narrowing again.

Charges may also be a factor. If the tables include charges then ITs will tend to outperform UTs by a few % p.a. (other thing being equal). I think the charges probably explain the longer term outperformance of ITs (last time I checked).

Other factors include discounts and gearing. These mean that ITs will tend to outperform UTs in a rising market and fall behind UTs in a falling market (other things being equal).

Thom

Bitstring , from the wonderful person david said

Discounts have been narrowing, and IT's are geared (have borrowed money) which helps when the market rises faster than the interest costs rack up.

IT's typically have rather lower costs than UT's, but you are at risk from the discount widening (although closed ended ITs, and ability to buy back their own shares have tended to alleviate the discount issue). You also have a bid/offer spread (which most UTs did too, but OEICs don't).

Not all ITs are geared, and those that have gearing are not necessarily geared all the time.

Don't OEICs have an initial charge, or a dilution levy, or something?

Another factor is that redemptions of UTs generally involve enforced selling of assets which may not be at a particularly attractive price. ITs don't have to sell their holdings to cover redemptions.

This also means that when new money is invested in UTs (because, for example, people see the market has been rising for the last few years) the money is invested in the market at the prevailing level. This can help to push the market higher in the short-term but doesn't really help your long term performance, IMHO.

Neil

True, but we're talking about the average, and on average most ITs are geared. Then tend to gear in rising markets and reduce in falling markets, but as even the best IT managers can't time the market perfectly the practical effect is the same.

I'd also add that IT tend to find it easier to hold large proportions of cash and that works like gearing in reverse, but only a few trusts tend to do that a lot (e.g., British Empure Securities or Personal assets).

To the extent that the better managers use the more flexible nature of the IT to increase returns it may also lead to outperformance. ITs also tend to be smaller than UTs and actively managing a small fund is supposed to be easier than a large one. One might argue that ITs also lend themselves to being used as personal investment funds or pension plans by the managers of the IT and more often than not that seems to help performance (e.g., Personal Assets or RIT Capital Partners).

Thom

True, but we're talking about the average, and on average most ITs are geared. Then tend to gear in rising markets and reduce in falling markets, but as even the best IT managers can't time the market perfectly the practical effect is the same.

I'd also add that IT tend to find it easier to hold large proportions of cash and that works like gearing in reverse, but only a few trusts tend to do that a lot (e.g., British Empure Securities or Personal assets).

To the extent that the better managers use the more flexible nature of the IT to increase returns it may also lead to outperformance. ITs also tend to be smaller than UTs and actively managing a small fund is supposed to be easier than a large one. One might argue that ITs also lend themselves to being used as personal investment funds or pension plans by the managers of the IT and more often than not that seems to help performance (e.g., Personal Assets or RIT Capital Partners).

Thom

Bitstring , from the wonderful person Neil Jones said

It's mostly only the trackers which are not (ever) geared. Overall ITs 'as a class' are geared, which is why they do better in a rising market (and worse often when it is falling).

Usually yes, but that probably never shows up in the performance numbers they quote.

Many thanks for all the interesting replies. On the whole is the cheapest way to buy investment trusts through share schemes run by the managers themselves? I get the impression there isn't much difference between that and going through a stockbroker but for smaller amounts

David

ATST will charge you a flat £2.50 if you buy weekly on their date. £15.00 if you buy daily.

Bitstring , from the wonderful person david said

It varies from manager to manager, but for small amounts it's often easier and cheaper to buy via the manager .. that's typically what I do with JPMF or Aberdeen. Sometimes they levy 1% on the way in, or the way out, but there are occasional 'no charges' deals available, and there is no annual fee. You still get the normal buy/sell spread on the share price though, but that's the same however you buy. Downside of going via a manager is that you never know the price ahead of time - so typically you ask them to 'invest £3k for me' rather than the more normal (with a stockbroker) 'buy 800 shares'.