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Chris Gilchrist: Classic failure of investment trusts


In the run-up to the RDR, investment trust managers got terribly excited about the new market opening up for their products. In a no-commission era they would, they hoped, compete on a level playing field with Oeics. And ever since they have succeeded in persuading innocent journalists to write articles about how wonderful ITs are and how they ought to be in individual investors’ portfolios.

Sadly, this has all proved to be wishful thinking caused by a fundamental lack of understanding of how advisers generally do investment.

I know many advisers who like ITs.  As I do, they probably own ITs in their own portfolios. But they do not buy them for their clients.

“Bah!” “Shame!” Cry the IT managers and gullible journalists. But they fail to realise how the adviser’s imperative of giving good investment advice conflicts with the realities of the closed-ended world.

The jugular question

How, to ask the jugular question, can you include investment trusts in model portfolios? The whole point of models is that you buy the same portfolio for every client. But ITs often swing suddenly from wide discount to narrow discount or premium. Why would you buy an IT at a premium to NAV? This very rarely makes sense. It can often result in losing money.

So if you have investment trusts in model portfolios you ought to take them out if they go to a premium, and end up either with several different portfolios or having to trade a lot more to keep all the portfolios the same. Neither of which is a good outcome for clients.

Worse, if you have a lot of money in your models, you will probably not be able to buy the ITs for all the clients at the same price, because underlying liquidity in the market is poor. That means some clients buy at one price and some at another. Some clients got to buy at a better price? This is not an outcome you would want to defend to the FCA or FOS.

“Well,” says gullible journalist, “why then use model portfolios? Why not bespoke them to the client?”

Please don’t laugh, advisers…

This is almost impossible to do. Even if you did it, your outcomes could be even worse than those produced by commission-churning stockbrokers in the bad old days – at least they had a monetary incentive to review and trade investments. Today, an adviser running model portfolios on a service fee incurs extra work for no reward with every switch. The few advisers who actually operate in this way have a small number of HNW clients – that is the only basis on which this can work.

There has indeed been an upsurge in investment trust buying since RDR. But it is mainly discretionary fund managers buying for their own model portfolios. And I am prepared to bet many of them do buy the same trusts week after week whether they are at a discount or a premium to NAV. So they fail to capture one of the major IT advantages the aforementioned journalists write about.

When even platforms like Hargreaves Lansdown cannot make investment trusts work, you know that in a world of Teslas and smart hybrids they are destined to remain classic cars – lovely for an enthusiast to take out for a spin occasionally, but you wouldn’t use them to drive to work or go shopping.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits The IRS Report



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There is one comment at the moment, we would love to hear your opinion too.

  1. Yes Investment Trusts are indeed like classic cars – the longer you keep them the more valuable they gat. (In the main).

    Mr Gilchrist is obviously a devotee of model portfolios, but there are still some of us who are bespoke. The matters which exercise him are not necessarily of concern to those advising on well managed Global generalist Trusts, such as RIT, Witan, BES, Caledonia etc. Keep these tucked away for ten years or more and a decent return is very often achievable.

    The real bug bear is the abysmal administration of some of these trusts. Anything the Halifax touches is a guaranteed nightmare. (BES). Many of the trusts don’t report back to the introducing intermediary. On line valuations are unheard of and the whole operation of acquisition and management is Dickensian. There is absolutely no recognition that we are in C21 and the way IFAs operate.
    Until the AIC and the Investment Trust industry up their game they are going to continue to be disappointed by their post RDR expectations. Throughput will remain with the masochistic minority.

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