Profit from investment trusts

Published by Sally Hamilton on 09 September 2013.
Last updated on 09 September 2013

Investment trusts

Investment trusts are collective investments listed on the stockmarket. They are popular with parents saving over the long term and can be more flexible and work out cheaper in terms of charges than their better-known counterparts, unit trusts or OEICs (open-ended investment companies).

They are lower profile than their open-ended siblings, partly because before commission was abolished under the Retail Distribution Review in January 2013, financial advisers tended not to recommend them - precisely because they earned no commission on them. But now, you may start seeing them added to the lists of investments recommended by advisers. Their main appeal is that they are cheaper - annual management costs are well under 1%, compared to 1.5% for unit trusts.

Investment trusts are like other funds in that they pool investors' cash to invest in a number of underlying company shares, perhaps very broadly invested across the world or a specific market. But, unlike other funds, they are companies listed on the stockmarket, have boards of directors (who can hire and fire fund managers) and have a limited numbers of shares available. This means investors can buy and sell them through a stockbroker just like any other share on the stockmarket.

Saving plans for children

The management groups behind them also promote investment trusts as ideal vehicles for regular saving, by offering low-cost savings schemes with low minimum investment levels. Several also promote savings plans especially for children, often with even lower entry-level amounts, typically £100 for lump sums or £20 to £25 a month for regular savings.

According to the Association of Investment Companies (AIC), a £1,000 lump sum invested in the average investment company (with annual charges of 3.5%) over the past 10 years would be worth £2,833 today. Over 18 years, it would be worth £4,177.

A £50 monthly payment invested in the average investment company with charges accounted for, would be worth £9,581 over 10 years and, over 18 years, it would be worth £24,835.

Normally, there are no initial or annual plan charges. But other charges include stamp duty (0.5% on purchases), the spread between buying and selling prices and, if you opt for a plan that has access to several different investment trusts, the cost of managing a portfolio. Some also charge performance fees.

Investment trusts' price advantage is starting to be eroded, however, as the unit trust industry is beginning to make its fees more competitive, but investment company fees remain generally lower for now. Meanwhile, a number of investment companies have also started reducing their own fees and removed performance charges, according new research by wealth manager Canaccord.

Another big difference for investment trusts is they can gear up - that is, they can borrow money to buy more shares in a sector they expect to do well. Managers also have more control over when share dividends are distributed, whereas unit trusts must do it when they receive them. Justin Modray, founder of financial website Candid Money, says: "Unlike unit trusts, an investment trust can retain up to 15% of its annual income as reserves, providing a potential buffer to help boost income in lean years."

This strategy has worked well, with more than 29 equity income investment trusts managing to increase their dividends every year over the past 10 years.

Tim Cockerill, head of collectives research at investment management firm Rowan Dartington, is a fan of investment trusts. He says: "What sets them apart from other funds is that they are equities traded on the stockmarket and, like Marks & Spencer shares, you can trade them any time the market is open. With open-ended funds, you can only trade them once a day.

"They often trade at a discount so that when you buy them at a discount you are buying the underlying investment more cheaply than that you would in the market. So, for example, if the investment trust was trading at a 10% discount and it contained BP, you'd be buying BP for 10% less."

Discounts can widen or narrow, however. Cockerill explains: "They've been narrowing in the last 12 months, which enhances performance of the fund although it makes it more expensive for someone buying. If you buy on a regular basis though, you don't need to be concerned about the discount widening as you can buy more cheaply."

Investment trusts Cockerill favours include Murray International, managed by Aberdeen Asset Management. It is a global fund, which, at the time of writing, is at a 15% discount; Jupiter Prima Donna Growth, which has a big focus on UK blue-chip firms; Henderson Opportunities, a relatively high-risk fund investing in small and medium companies; and Alliance Trust, a giant in the investment world (with assets of £2.4 billion). For a bit of spice, he suggests Pacific Assets, managed by First State - recent winner of a Moneywise Customer Service Award for Most Trusted Fund Manager. "It's a sensible investment house, a quality company, quite conservative with strong balance sheets."

As for savings plans, he likes the Alliance Trust savings scheme, with its minimum investment of £50 and its 30-strong list of underlying investment trusts to choose from - and you can mix and match with other types of fund, too.

Several also offer Jisas, including Alliance Trust Savings, F&C, Fidelity, JPMorgan (JPM) and Witan. Many investment trust managers also manage unit trusts, such as JPM, for example. Of JPM's top 10 Jisa fund choices, seven are investment trusts; several of them higher-risk funds. However, its top 10 also includes diversified, large-cap funds, such as JPMorgan Claverhouse and JPMorgan American investment trusts, which reflect the more conservative strategy many parents adopt as their child nears 18.

You can buy investment trusts (individually or through Jisas or share plans) direct from the fund manager or through platforms such as Alliance Trust, Hargreaves Lansdown and the Share Centre. Savings plans need to be started with the fund manager because, as an Alliance spokesman put it: "In much the same way you cannot open an RBS deposit account with Lloyds, you cannot open an Alliance Trust Savings scheme on any other platform."

One advantage of investing in a savings plan, as opposed to a Jisa or Isa, is that there are no maximum annual investment limits and you can have as many schemes as you like - but you will have to keep an eye on the tax implications.

There is more information on investment trust saving for kids on the Association of Investment Companies' website or you can call for a free factsheet on 0800 085 8520.

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