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Out for the discount?

The decision to axe the controversial “its” advertising campaign will have

disappointed marketeers in the industry who understand the benefits of

long-term brand building.

Some of the smaller specialist investment trust managers, for whom the

campaign had attractive economies of scale, may also regret the move.

Nevertheless, for IFAs and investment trust managers, the decision to

focus funding on developing the IFA market and PR activity has to be the

right strategy given a restricted budget. The question some IFAs may pose

is: “Without widespread promotion, will the demand for investment trusts

fall and discounts widen?”

This is particularly pertinent as the need remains to replace

institutional shareholders with smaller private investors.

Critics of the “its” campaign believe there is little evidence that the

promotional activity went beyond stimulating awareness. Meanwhile,

investment trust analysts would assert that the major factor behind a

marginal reduction in the average level of discounts over the period of

the campaign was the introduction of share buyback schemes.

For IFA clients holding a portfolio of investment trusts, this has proved

to be one of the better strategies over the past three years and

particularly the recent 18-month period of market volatility.

The key question for investors today is what are the opportunities from

the world of investment trusts?

Charles Rawson, manager of the £50m Exeter managed growth fund, which

is in essence a fund of investment trusts, believes that discounts will not

widen. He cites more share buyback schemes and says that even if the

prevailing market weakness continues the average discount is not likely to

move significantly.

This is a contrarian view as discounts tend to widen when markets ease.

Rawson warns that investors should be wary of averages such as the discount

on the FTSE investment companies index.

The reason is something he calls the 3i factor. 3i is a giant in terms of

investment trusts and trades on a hefty premium as it makes up a

significant proportion of the index. It therefore skews the average, much

in the same way that Vodafone affects movements in the FTSE 100.

Nevertheless, after stripping out the 3i factor, discounts on investment

trusts have closed a little and remain in the region of 10 to 12 per cent.

Does this offer an attractive opportunity? As with many investment

opportunities, timing is everything, whether you look at investment trusts

as a whole or at individual stocks.

Probably one of the worst times in recent years to invest was in the heady

days of late January 1994, when the average discount on investment trusts

was a narrow 3.8 per cent. Since then, the FTSE investment companies index

has returned 69 per cent compared with the 94 per cent return from the FTSE

All Share index.

However, by delaying investment by a mere five months, during which time

the discount widened to 7.7 per cent, investors would have seen their

return rise to 100 per cent.

The gain was as much down to investing at a time of weakness, caused by

the change of direction in US interest rates, as it was to getting in at a

wide discount.

However, the performance was again bettered by the FTSE All Share index by

some 20 per cent. It is only when one reviews the performance of the sector

over a shorter period of time that investment trusts have outperformed the

All Share.

A striking statistic is that, over the last three years, investment trusts

have outperformed the All Share by a three-fold margin, at 25 per cent

compared with 8 per cent.

Three years ago, discounts were persistently wide and today they are still

in double figures. This statistic says more about the asset allocation and

management within the sector than opportunities caused through discount


The real gains are to be made on a stock-specific level. Individual stocks

display widely changing discounts, some of which may prove to be anomalous.

A fund manager who is skilled and experienced in identifying these

anomalies is able to add value to both the IFA and his clients. However,

this is only part of the equation. The choice of sectors and analysis of

the net asset value performance are vital factors which need to be


By using a fund of investment trusts, outperformance has been achieved in

recent years. Proof of this comes from a review of the three-year figures.

Funds of investment trusts top Autif&#39s global growth and active managed

sectors, showing they have added value through outperformance.


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