Personal Finance

Investment trusts: the best way to get good value from the City

We tend to be sceptical of the ability of fund managers to justify the amount of money they cost. The point of investing in an ‘actively-managed’ fund is for the manager to give you a better return (after costs) than you could have got by buying a ‘passive’ fund that just tracks the underlying market instead. Trouble is, few active managers manage to beat the market consistently over the long run and, to add insult to injury, they charge you handsomely for the privilege.

However, there’s one type of fund that can deliver market-beating returns on a regular basis – if history is anything to go by. We’re talking about investment trusts. These are stockmarket-listed companies that exist to invest in other companies – effectively, they are funds that are floated on the stock market. Figures from stockbroker Canaccord Genuity show that, in the five and ten years to the end of 2013, investment trusts in 14 out of 16 sectors examined beat their ‘open-ended’ (unit trusts and OEICs) fund rivals, often resoundingly.

So what makes investment trusts different? With an open-ended fund, the price of the fund reflects the value of the underlying portfolio (the net asset value, or NAV). With an investment trust, the share price you pay merely reflects demand for the shares of the trust itself. This means the trust can trade at a ‘discount’ or ‘premium’ to NAV – in other words, you might end up paying less or more than the underlying portfolio is worth. This can results in very attractive opportunities – it is possible to find investment trusts trading at discounts of ten per cent or more (meaning you’re effectively paying 90p for £1’s worth of assets), although it’s not as common as it once was.

Historically, investment trusts have also been cheaper than open-ended funds. And unlike open-ended funds, they are also allowed to use ‘gearing’ – to borrow money to invest. This has the potential to boost returns (assuming the manager gets it right), by amplifying gains – but of course, it also amplifies losses in a bear market. They can also take a longer-term view than open-ended funds. With open-ended funds, liquidity is always a risk – if lots of money leaves the fund, the manager might be forced into a fire-sale of the underlying assets. But because trusts are listed, investors who want to exit just sell their shares on. As Melissa Gallagher of Allianz Global Investors notes, this means investors can “invest in specialist areas without the performance of the fund being affected by redemptions”.

With financial advisors banned from taking commission, the case for investment trusts is a little less clear-cut. Because advisors no longer have an incentive to favour one form of fund over another, trusts have attracted more money. DIY investors have
also boosted demand – as Gallagher points out, the percentage of shares in Allianz trusts (such as Allianz Technology and Brunner Investment trust) being held on ‘execution- only’ stockbroking platforms has soared in the last two years. As a result, ‘discounts’ have narrowed to their lowest levels in decades, and open-ended funds are under pressure like never before to reduce their fees.

That said, trusts are increasingly cutting charges too – scrapping performance fees and reducing their ongoing charges. Given their history of outperformance we’d expect the best ones to remain highly competitive compared to open-ended funds. You can see some of our favourites below.

A few of MoneyWeek’s favourite investment trusts

At MoneyWeek magazine we run a portfolio of six investment trusts which aims to provide absolute returns – in other words, our concern is to protect money in bear markets and to beat inflation in a bull market.

To protect money on the downside, for example, we like Personal Assets Trust (LSE: PNL). It hasn’t done well during the bull market but that’s because it’s a fund for hard times, with large holdings in gold, index-linked bonds, cash and big blue chips.

Meanwhile, to get exposure to the so-far ongoing bull market, one trust we like is Finsbury Growth and Income (LSE: FGT), run by the extremely successful Nick Train. Train has a superb track record, and takes big, genuinely contrarian bets on stocks he believes will do well in the long run – in short, he’s everything an active fund manager should be. You can find out more on our full model portfolio at

Trusts with more specific areas of focus worth considering include the Baillie Gifford Japan Trust (LSE: BGFD) as a way to play one of our favourite markets. The Templeton Emerging Markets investment trust (LSE: TEM), headed by Mark Mobius has long been one of the most popular ways to play emerging market funds.

If you are interested in backing renewable energy, but don’t have the space or inclination to clad your roof with solar panels, you might want to consider the Renewables Infrastructure Group (LSE: TRIG) or Foresight Solar (LSE: FSFL) funds. TRIG gives exposure to both wind farms and solar plants, while Foresight focuses on funding solar projects. Both aim to pay attractive dividend yields to their investors.


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