Phil Wickenden: Investment trusts get a bad press – but are they worth a look?

Phil-Wickenden-MM-Peach-700.pngThe proven way to add value is to do extremely difficult work (well). That seems obvious, right? If you do something that is valued but scarce because it is difficult, you are more likely to be in demand and to be compensated fairly for what you do.

The only thing about “difficult” is that – you guessed it – it is not easy.

Yet it is a lack of knowledge (57 per cent of advisers) and perceived complexity (36 per cent of advisers) that has discouraged many advisers from using investment trusts to date. In other words, the difficulty is both the opportunity and the sticking point – as it so often is.

One of the main advantages of investment trusts is that they can borrow money against the assets the portfolio owns. Gearing, hence, can amplify both positive and negative (when the fund manager gets it wrong) returns.

Dividend reserves are another advantage in an investment trust’s armoury. Statistically, investment trusts are cheaper and produce better long-term performance than their Oeic or unit trust cousins. That said, only 29 per cent of advisers admitted they routinely consider (where appropriate) investment trusts and 26 per cent said they would not recommend them under any circumstances.

We all make choices, even when we do nothing

Encouragingly (on the face of it), 45 per cent said they would look to use investment trusts in the next three years as availability on platforms improves markedly. “Look to use”, however, is as pretty non-committal  as it gets, and I would wager platform availability alone will do little to improve the level of engagement without a bit of elbow grease.

The lack of understanding or the choice not to become better informed is perhaps the real issue at hand. Because it is a choice. We all make choices every day. Some choices we make with purpose and some we make by not taking action – simply by choosing to go with the status quo.

Habits are a choice. Work is a choice. Reputation is a choice.

As American author Seth Godin says: “No one can be responsible for where or how we each begin. What we choose to do next, though – how to spend our resources or attention or effort – this is what defines us.”

The bottom line is this: your life is the outcome of the choices you make. If you do not like or question the outcomes you are currently experiencing, make better choices.

Phil Wickenden is managing director of Cicero Research



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. I fully understand IT’s, however I can also fully understand why many people shy away from recommending them in the current market.

    How do you quantify the additional risks gearing presents? After all a geared investment is by definition higher risk than a non geared one.

    How do you explain those extra risks to a client in a way sufficient to satisfy the FOS or FCA?

    How do you model risk on an IT that may have very wide borrowing remits?

    The lack of access via platforms has been part of the problem, but in a world where risk and explanation of it, is critical in the regulators eyes, how do you honestly recommend an IT/IT’s other than to clients with very high risk profiles?

    • Duncan

      As well you know some ITs have very little or no gearing. As far as platforms are concerned there are enough that do allow ITs as well as direct shares and practically everything else. I suggest you take a look at the Share Centre just as one example.

  2. Bad press? What have you been reading? From what I read they get a brilliant press – far better than the UTs and OEICS.

    Difficult? Well I guess for those using model portfolios, DFMs and all the other manufactured solutions I would guess that they find all investment difficult.

    Your piece omitted to mention that the charges on an Investment Trust are invariably a lot lower than OEICS. The dividend record of some of them is truly amazing. I think there are about 15 who have over 30 years of consecutive dividend increases and some of even up to 50!

    Yes there may be gearing, but the AIC produce monthly statistics (available on line) and a few moments study will reveal quite a lot of information, as will the half- yearly and annual reports available on individual trust web sites.

    They also provide exposure to the sort of investments otherwise unavailable. Private equity, hedge funds etc. Indeed if one bothers to do a little research one can see that many Investment trusts significantly outperform their OEIC counterparts with lower volatility and a significant number do a lot better than the indices and trackers! Particularly over the longer term.

    I guess it doesn’t really occur to most that some of the UK richest families originally started investment trust to preserve their wealth and are still major holders today. (Rothschilds, Cayzer, Brunner, Salomon, Rushbrook etc)

    The real bad press is that far too few advisers recommend Investment Trusts to their clients.

  3. With you on that Harry
    Always felt the gearing was pretty simple and price to discount/premium is logical much like share pricing

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