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Can advisers afford to shun investment trusts?

Investment trusts have had their fair share of critics over the years and have struggled to win over advisers and retail investors.

One of the criticisms is they are of a bygone age although one old warhorse, it would seem, has proved many critics there is life in them yet.

Witan is finally back on track, although it has been a long hard slog. It was back in 2004 when it took radical steps to improve performance after a sustained dismal run – it had lost 20 per cent of its value in the previous five years. It decided to ditch its one-manager-runs-all strategy and hired several groups to run segments of the portfolio. This multi-manager approach was an industry first.

The move was not an instant success. But at least Witan’s board had the gumption to act and replace poorly performing fund managers, take on a more proactive mandate, raise gearing levels and make some share buybacks – and it is a strategy that has finally paid dividends. It is even has a star manager in Nick Train who runs £100m of the trust’s £1.2bn assets.

The trust outperformed its composite index by 3.1 per cent in 2010, with the company delivering a total return of 18.9 per cent against a benchmark gain of 15.5 per cent.

And once again, research shows that investment trusts outperform unit trusts. According to Collins Stewart, they have outperformed by up to 7 per cent annualised over 10 years.

At a time when fund firms are beginning to wise up to lower fees ahead of the RDR, prominent investment trusts have a big headstart. Of the 22 companies featured, the average annual fee is 63 basis points (of NAV) less than the equivalent open-ended fund.

Alan Brierley at Collins Stewart, author of the report, is scathing in his remarks to IFAs, some might even suggest he has a chip on his shoulder because investment trusts continue to be the poor relation to unit trusts and Oeics.

IFAs say they do not recommend investment trusts as they are complex and can be risky because of gearing.

Yet Brierley makes a fair point when he says advisers who bemoan the supposed complexity sell structured products that “continue to make Fermat’s last theorem look like my four-year old daughter’s Winnie the Pooh jigsaw”.

He also acknowledges losses from high gearing levels can be compounded in falling markets but says favouring unit trusts because they will fall less is not the most convincing of arguments – cash would offer much greater defensive qualities.

Brierley suggests payment of commission has “fuelled a blinkered approach by many so-called independent advisers,” and this has been a key driver of the long-term growth of the open-ended fund industry. Although his wrath is not simply directed at IFAs, he also says management companies have shown the same enthusiasm when marketing the effectively captive, lower-margin investment trusts as they have done for their open-ended funds.

Brierley will be hoping the RDR will loosen the shackles and a new wave of advisers will begin to see the merits of the oldest collective vehicle but he wants to know why advisers should wait. He says: “Given the proven track record, significant valuation differentials in most cases, much lower management fees and the potential for NAV enhancements through the use of gearing and share buybacks, we struggle to see how so-called ’independent’ advisers can continue to ignore the closed-end industry?” Open mike time.

Paul Farrow is personal finance editor at the Telegraph Media Group


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. I suppose Mr Brierly would say these things..

    Are his perceptions one of the triggers for the RDR?

  2. Every so often I take a look at the performance data on Investment Trusts and remain unconvinced. Higher volatility and only a handful seem to have produced better returns than Unit Trusts over the medium to long term. Many have produced significantly worse returns. I just don’t see the attractions of using them.

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