How often do you buy investment trusts these days? Probably not as often as you did a few years ago. It used to be that those of us who objected to paying the absurd fees charged by most unit trusts (up to 5% up front followed by a good 1.5% a year in management fees) and who wanted easy access to diversified portfolios always bought investment trusts. We looked at them and we saw all sorts of advantages.
The management fees were more like 1% than 1.5% and, while we paid a spread when we bought and sold the shares in our chosen trusts, it rarely came in anywhere near the entry fees of the unit trusts. At the same time, it was good to know that investment trusts, as listed vehicles, mostly had good governance standards and that if we wanted to sell them we could do so any time the market was open – it could take days to get your money when you sell a unit trust.
I’ve also always been biased towards investment trusts on the basis that, unless they issue more shares, they can only get their fee income up by performing well (and therefore increasing the size of their fund organically). Unit trusts, on the other hand, get their fee income up by spending vast amounts on marketing to persuade punters to buy new units in their funds, hence expanding their total funds under management. This just doesn’t seem to come with the right incentives.
Finally, investment trusts come with the ability to gear up their holdings, something which has always added a little frisson to holding them – most of us don’t often get to borrow money to buy shares.
So, why might we be less interested in these wonderful sounding things than we were? Simple: exchange traded funds (ETFs). Few people had heard of ETFs only five years ago, but now, if you want to sort out your asset allocation easily and cheaply, these listed trackers have to be your first port of call.
They’re cheap – much cheaper than your average investment trust – and they couldn’t be easier to understand. There’s no gearing and there’s also none of the discount/premium business that can be so irritating with investment trusts. As the latter are just listed companies, the business of which is to invest in other companies, their shares rarely trade at their actual net asset value. They’re either above it (which suggests the market expects their net asset value to rise) or below it (which suggests the opposite). This can be nice for arbitrageurs and can give you a good uplift if you buy at the right time, but much of the time it’s just a distraction.
ETFs are also available in some form or another to track almost everything from the Brazilian stock market to the price of lean hogs. My own Isa and Sipp are now stuffed with them. But just because something new (and good) has arrived, we shouldn’t be too quick to dismiss the investment trust sector. All the good things remain.
They are still the best place for ordinary investors to get gearing outside hedge fund land and if it is active rather then passive management you want, I can’t see any reason to hold a unit trust over an investment trust.
There are also specific areas where it might just make more sense to hold them over ETFs. Hedge funds are the obvious example – the successful listed BH Macro fund (LON:BHMG) has just made it into the FTSE 250.
But another might area might be infrastructure. This is the investment story of the decade. The usual number quoted for the expected spending on various infrastructure projects over the next 10 years is $22,000bn (to put that in perspective note that the subprime fiasco will only end up costing the banks a couple of trillion).
Much of this money will go to attempting to patch up the dismal infrastructure of the US (where electricity blackouts are increasingly common and the water system leaks as much as it delivers) and to sorting out similar problems in Europe and South America, where 10% of the population still don’t have electricity.
But well over half of it is forecast to be spent in Asia, where if economic growth is to be sustained, new airports, roads, rail networks, electricity grids and sanitation systems are going to have to be built in a hurry. According to Citi, China will spend $500bn on road and rail projects in the next 30 years, and it is already spending over 10% of its GDP on infrastructure.
You can get access to all this growth on a very diversified basis via ETFs such as the iShares S&P Global Infrastructure ETF (NYSE:IGF), which holds shares in companies operating everything from marine ports to utilities and highways. But better might be the HSBC Infrastructure Company Limited (LON:HICL), which holds the underlying assets and also pays a 5% dividend. Otherwise, there are some interesting Aim-listed investment companies in the sector (these aren’t strictly speaking investment trusts but the result is the same).
I like the look of Utilico Emerging Market Limited (LON:UEM). It is 36% invested in Brazil but also has another 50% or so of its assets invested in Asia (nearly 20% in China) and currently trades on a mild discount to its NAV.
Finally, if you are thinking emerging markets infrastructure you can’t forget Africa. Sub-Saharan Africa is forecast by the IMF to grow around 6.5% this year (faster in the oil-producing countries, slower in the others) but for this to continue, the infrastructure is in urgent need of an upgrade (or in many cases just a build).
To tap into this, you can buy into Aim-listed PME African Infrastructure Opportunities (LON:PMEA). This is small; it only listed last year; it hasn’t made many investments yet; and it is trading at a premium to its net asset value, but it is, I think, the only fund giving easy access to African infrastructure. No ETFs there.
This article first appeared in the Financial Times.