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Abbey shuns ‘too risky’ investment trusts

Abbey will not include investment trusts in its multi-manager portfolios as it believes they are too risky to hold.

Ucits III legislation gives multi-managers the flexibility to invest in a mix of closed-ended and open-ended funds. and boutique fund managers T Bailey and iimia are among those which will be taking advantage of the legislation.

But Abbey head of client investment and multi-manager development John Kelly thinks the ability to gear and the likelihood of trading at a discount to the net asset value makes investment trusts a risky vehicle for multi-managers to hold.

As listed companies, investment trusts have quoted share prices which can trade up or down relative to the total value of their underlying assets. Trading at a discount to NAV may represent good buying opportunities but the danger is that discounts may continue to widen once the fund manager has bought.

Investment trusts can also borrow, leading to a geared impact when stockmarkets move, which potentially increases volatility.

Kelly says: “As the arbiter of price is the stockmarket, you are giving away an element of control over your portfolio if you include investment trusts. You cannot know the price you are going to get or the risk in the underlying fund. Not only are multi-managers betting that they can find the best investment trusts, they are also betting on whether the stockmarket agrees with them. Basically they are past their sell-by date.”

Gartmore also does not currently use investment trusts although it remains open-minded about the possibility of investing in them.

Gartmore Portfolio fund manager Marcus Brookes says: “When we set up our multi-manager funds, the investment trusts we looked at were trading at a premium to NAV. It is also dreadful as a fund manager to do all the work and research, decide what investment trust you want to buy, then find there is no liquidity in it.”

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