Investment trusts – when big is better

When the idea that commission paid to investment advisers by unit trust companies was to be outlawed by the Retail Distribution Review (RDR) was first announced, the investment trust industry was thrilled. Why? Because independent financial advisers (IFAs) tended to ignore investment trusts – even if they had performance histories significantly better than their equivalent unit trusts – on the basis that they didn’t get paid for suggesting them to clients.

The hope was that when they didn’t get paid for recommending unit trusts either they might become a little more even-handed. That looks like it will happen (surveys regularly show IFAs getting keener on investment trusts).

But it doesn’t mean that the whole industry will benefit equally. There is bound to be a rush towards the very big, very liquid and very good trusts – Neil Woodford’s Edinburgh Investment Trust being the obvious one to point to here. But what of the small trusts?

If they have under £100m under management they generally aren’t very liquid – ie, it isn’t that easy to buy and sell them. They also tend to come with large discounts, something that can put both big and small investors off. With this in mind I am interested to see some movement at the Troy Income and Growth Trust.

I interviewed its manager Francis Brooke in the magazine a couple of months ago and we are fans both of Troy as a whole and of this trust – it is up over 100% in the last three years against a rise of 50% in the FTSE All Share. But it is still a small trust.

Assets under management are currently around £80m – £20m short of the level that IFAs think they need a trust to be before they will put their clients into it. That’s about to change. The Albany Investment Trust announced today that it is to reconstruct itself, giving investors the opportunity to roll their money into TIGT without incurring capital gains tax.

The Grampian Investment Trust (which Troy already runs) has announced the same. Albany currently has about £30m of net assets and Grampian has about £10m. Assuming the majority of shareholders accept the rollover – and why shouldn’t they given Brooke’s excellent performance? – this will push TIGT nicely over the £100m level.

This is pretty much good news all around. Current TIGT investors will be pleased at the rise in liquidity that comes with a rise in the size of the fund and by the fact that the fixed costs as a percentage of their holdings will fall, while Albany and Grampian shareholders will be getting out of small funds trading at nasty discounts into a bigger one trading at par or a premium. TIGT has been the best performer in the income and growth sector in the last three years. Albany has been the worst. It all makes sense.