Solid performers reap big rewards

During the market turmoil at the end of 2007, UK investment trusts held their own. Experts say turmoil is just another obstacle on the road to profit.

Investment trusts can offer the possibility of enhanced investment performance and returns for those willing to take a long-term view, thanks to the flexibility and versatility of this investment vehicle.

Strong performer

"By and large, investment trusts tend to outperform unit trusts," says Jim Tennant, head of investment trusts at Gartmore. "This is mainly because they can gear. Over the long-term, markets go up, so if you're geared at the right time through that period, you should be able to get higher performance," he says.

A glance at a comparison of unit trust and investment trust performance confirms this. A £100 lump sum invested in the average investment trust or closed-ended investment company returned £193 over the three years to the end of July 2007, compared with the average unit trust's £151. Over a longer period, the gap widens further. Over 10 years, the average investment trust returns £246 on that £100 investment, compared with the unit trust's £183.

Challenging times

Investment trusts, like other asset classes, have had mixed fortunes in terms of performance over the last decade, however. In the build-up to 2000, the sector enjoyed strong investor appetite, whetted by the technology boom. But when these heady days ended, investment trusts felt the effects of the financial downturn.

This was felt most keenly in the split capital arena, culminating in the split capital mis-selling debacle that peaked in 2002 and tainted the investment trust industry as a whole.

There has been more positive growth in the investment trust world in recent years, helping demonstrate the merits of this asset class. Gavin Haynes, managing director of independent financial adviser Whitechurch Securities, says that five years ago investors had lost faith in stockmarkets, and discounts in investment trusts were particularly wide. Since then, those gaps have narrowed overall.

Long-term investors reap rewards

Jeremy Tigue, fund manager of the Foreign & Colonial (F&C) Investment Trust, points out that, despite the ups and downs, most of those investing for the long-term would have made money over the last decade.

"Even taking into account the severe bear market we endured from 2000 to 2003 - the worst for 30 years - most investors in investment trusts would still have made money over the last 10 years," he says. "They wouldn't have done in Japan and in a few technology funds, but apart from that, broad spreads of investments - in Europe, small companies, large companies, mining, resources and utility funds, for example - would all have done very well over that period."

Figures from the Association of Investment Companies reflect the rising popularity of investment trusts. In December 2000, there were 358 investment companies with total assets of £78.8 billion. The ensuing downturn saw this drop to £47.7 billion by the end of 2002, although by then there were 363 investment companies.

The sector then began to grow again, and in 2007 the industry's assets hit their highest level ever, reaching nearly £100 billion. At the end of July 2007 the UK investment trust sector was worth £95 billion, and 316 investment trusts were in place. The average discount has fluctuated over the years. It averaged 12.3% at the end of 1997 and 12.7% at the end of 2002. It sat at 7.3% at the end of August in 2007.

Gearing increases positivity

"Markets picked up in 2003, and the bull market effectively restarted," says Richard Wallis, deputy head of research and investment at IFA Origen. "Since that point there are areas that have done very, very well and the gearing has just exaggerated that situation."

Wallis says performance in specialist areas has been particularly strong in recent years, while some of the older and more traditional investment trusts, such as the F&C Investment Trust, have lagged. "Some of the returns are still pretty good, but compared with their respective sector averages, they've plodded," he says.

Similarly, Craig Wetton, investment director at IFA firm Chartwell, suggests some "core" investment trusts are sitting at quite large discounts. However, he says many of these larger core trusts have taken a "long, hard look" at how they are managed and started making greater use of mechanisms such as share buy-back to help keep discount levels under control. Some have also revamped their investment style, moving to segregate investment mandates in a bid to boost performance.

The Witan Investment Trust, for example, has moved to bring in sub-managers for specific areas, such as a UK manager for UK investments and a European specialist. These changes are beginning to be reflected in investment trust performance, but some discount levels are still wide, despite managers' best efforts, Wetton says.

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