Investment trusts come of age

Thanks to changes in management fees, investment trusts have become almost fashionable. John Stepek reports.

John Stepek
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We've long been fans of investment trusts at MoneyWeek. Up until very recently, investment trusts have spent much of their time being seen as a relatively obscure backwater investment, but there's nothing particularly complicated or exotic about them.

The neglect stemmed partly from the split-capital trusts scandal at the turn of the millennium. But the real problem was more to do with the way that financial advisers (IFAs) have been compensated for selling funds in the past. In short, unit trusts (also known as open-ended funds) paid comission to IFAs, and investment trusts didn't.

Thanks to the Retail Distribution Review regulatory changes, that's all ending now. With IFAs charging upfront fees rather than taking commission payments, and more investors taking charge of their own finances, investment trusts are on a more level playing field with their open-ended cousins.

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As a result, as Andrew M Brown puts it in The Spectator, investment trusts "are in danger of becoming fashionable". Last year "saw a 66% rise in purchases of unit trusts through fund supermarkets".

The point of unit and investment trusts is the same: a manager raises money from a large group of investors, and invests it on their behalf in a range of companies. The big difference is in their structure.

Investment trusts are companies, and are listed on the stock exchange. This means that the price of the fund is not dictated by the value of the underlying portfolio, but by demand for the shares.

As a result, investment trusts often (though less often these days, as they've become more popular) trade at a discount to their net asset value.In other words, you get to buy the underlying portfolio for less than it's actually worth.

Another key difference to be aware of is that investment trusts can also borrow money to invest (gear up'), so that they can take bigger bets in bull markets.

This adds risk, but past performance data for trusts suggest that managers cope with this risk well investment trusts across almost all sectors have tended to outperform their unit-trust peers in the long run, according to data from Canaccord Genuity, an asset manager.

Richard Evans in The Daily Telegraph notes that many investors in popular unit trusts could get virtually the same exposure via related investment trusts.

Among the more interesting names he notes is the JP Morgan Emerging Markets trust (LSE: JMG), which offers similar emerging-market exposure to its sister unit trust, but at a decent-sized discount of around 10%.

John Stepek
John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.

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