A long time ago I learned a secret used by rich investors. It’s something I’ve used myself ever since and I’ve told you about it here in The Right Side too.
It was back in 1996. I’d just started in the fund management business. My job was looking after wealthy private client accounts. And I noticed right away that their portfolios were stuffed full of little-known investment trusts. These rich guys didn’t touch the unit trusts most retail clients use.
And the story is much the same now. These elite investments remain well off the radar of most UK investors. But thanks to an update in the legislative regime, I think that’s going to change. Today I’d like to show you why these investments, that were once the preserve of the wealthy, could soon become popular with all retail investors.
I think that’s going to push prices up. And that means now is a great time to get in – ahead of the crowd! I’ll show you where to get some great investment trust ideas…
Why the UK’s wealthiest investors put their money in investment trusts
Ever since I cut my teeth in the City I’ve been a fan of investment trusts. I saw first hand where and why the money of the seriously rich headed into them. Knowledge of these trusts was passed down from generation to generation of fund manager since they started around 140 years ago.
And it’s little wonder they’re popular. Research by both Winterflood’s and Collins Stewart has found that investment trusts tend to outperform their unit trust buddies.
Another report out from JP Morgan Asset Management (JPMAM) backs up my hunch about whose money benefits. It turns out that the major holders of the UK’s largest investment trusts are wealthy individuals (through their private fund managers) and specialist institutions. In other words, it’s the sophisticated City brigade and their clients.
Why we like investment trusts
Investing in funds: why we prefer investment trusts to unit trusts.
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What’s shocking to me is that the public (as advised by independent financial advisers) own less than half a percent of these investment trusts! And when you realise the set-up, you’ll see why that is…
IFA’s don’t (and can’t) receive a fee for advising clients to buy investment trusts. So it’s little surprise that these trusts don’t appear on most of their ‘platforms’ (the software packages that list the funds available to clients).
In a survey by JPMAM a load of IFAs freely admitted that they don’t point punters in the direction of investment trusts because there’s no commission in it for them.
But things are set to change. As of 2013, IFAs will no longer receive commissions from any of the funds they punt out to clients. They’ll be charging a fee for their advice instead. That means investment trusts will rank on a level playing field with the stuff IFAs normally promote.
In fact, the largest ‘platform’ providers have said that they will include investment trusts alongside the unit trusts and OEICs (open ended investment companies) that are currently the mainstay of the industry.
Why investment trusts should be an even better bet now
There’s a great article in last week’s MoneyWeek magazine on investment trusts. I’m not going to run through the whole thing here. I want to focus on just one thing.
This is the most important difference between investment trusts and the more usual retail products. And it’s why I think investment trusts are set for a one-off gain.
First let’s just recap on what the IFA tends to offer. Unit trusts and OEICs are funds that allow clients to buy a professionally managed portfolio of stocks in one go. Every day the fund manager will calculate the value of the fund and he offers a price for each unit. If you buy, the fund manager creates new units priced at the net asset value (NAV). But be aware that’s not all you pay. You also have to pay an initial commission which can come in around 5%!
Investment trusts are totally different.
An investment trust is not so much a fund as a stand-alone company. Each one has its own stock market quote and they trade just like any company share.
The company invests in other quoted stocks. It appoints a fund manager to go out and buy a portfolio of shares. Like any other businesses, it can borrow money too. Then the manager can go out and buy even more shares of the businesses they like. In other words, they can use leverage.
Long-time readers of The Right Side will know I’ve tipped several investment trusts in the past. From a pharmaceutical trust, to an emerging market trust and a commodities trust.
Of course, just like any other stock, it’s investor demand that determines an investment trust’s price. That’s important. The NAV of the fund doesn’t determine what you pay for the stock. Ultimately the price investors are willing to pay will bear some resemblance to the NAV of the stock, but there can be quite a difference. I’ll show you how…
If the investment trust has a great track record it may trade at a premium to NAV. So the market cap of the trust may be £100m while the value of shares it holds could be only £95m.
But historically funds tend to trade at a discount to NAV. And that’s what’s interesting today.
Many funds are trading at a discount of more than 10% of their assets. But what’s going to happen if a whole load of new punters comes along demanding stock? Well that’s why I think this is a great opportunity now.
Now is the time to pick up investment trusts cheaply
The way I see it, the fact that investment trusts tend to have low fees and outperform rivals means any IFA worth his salt is going to have to consider them. And new IFA exams are set to include more detail on investment trusts too – so finally they can’t use ignorance as an excuse for not putting clients into them.
As with any stock, demand tends to push up prices. And that’s what I expect to happen here. I expect the discounts to NAV to narrow.
That means now is a great time to pick up a trust or two. I’ll be continuing to seek out great deals in the investment trust space. And I’ll tell you about them in The Right Side. But for now, check out the five investment trusts Sandy Cross recommended in last week’s MoneyWeek magazine.
The article is well worth a read for anyone wanting a bit more information about investment trusts. And you’ll get Sandy’s top five investment trusts, too.
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