An easy way to shop for the stock market funds that offer value

There will be a huge reveal of the most important treasure of the City – investment trusts.


These trusts have been secret for everyone but the rich and the knowledgeable. Now, there’s a possibility that they will become open to most private investors and all other people who might want to be involved.

Investment trusts don’t take even 1% of all the transactions within adviser platforms. The latter are a sort of online shops offering investment products. Well-informed advisers had always had access to this gem, but less than one per cent shows how secretly everything had been done earlier.

The situation is about to go through many changes, as one of the largest financial advisers’ platforms in the UK, Cofunds, was sold by its owner, Legal & General. The buyers were the Dutch financial group Aegon, and it decides to start providing the services of investment trusts to the wider public.

What is the difference between unit and investment trusts?
Both buy portfolios of shares or bonds, but whereas the unit trust price is calculated each day by the fund manager and exactly reflects the underlying value of the portfolio, the investment trust’s shares are traded on the stock market and the price reflects supply and demand for the shares, and could be higher or lower than the underlying value of the portfolio. This is known as standing at a premium or a discount to net asset value (NAV). In addition, investment trusts can borrow money to buy more shares in the portfolio — a process known as gearing. This has a multiplier effect on performance, upwards and downwards.

What is the Cofunds platform?
It is a fund supermarket where a range of investment products are on display. However, the Cofunds supermarket is not open to ordinary members of the public. It is more like a cash-and-carry that is open only to people in a certain industry, in this case financial advisers who buy funds on behalf of their clients.

Why is this change such a big deal?
Until now Cofunds did not offer any investment trusts on its platform. This meant that the thousands of private investors whose advisers dealt through Cofunds would not have direct access to investment trusts. Ian Sayers, the chief executive of the Association of Investment Companies (AIC), the industry trade body, says: “This is another important step towards investment trusts gaining their deserved place in the portfolios of advisers’ clients. They can now be accessed on the vast majority of adviser platforms — a significant change from the situation a few years ago — with more than 1,000 adviser companies now buying trusts through platforms.”

Why haven’t investment trusts been more widely available before?
It isn’t because they are no good. Most comparisons between unit and investment trusts show that investment trusts come out ahead. Figures from Moneyfacts, the financial research group, show that, over the past five years to August 1, the average return on UK equity income unit trusts was 46.3 per cent, while for investment trusts it was 62.6 per cent. Over ten years equity income unit trusts returned 66.5 per cent, compared with 92.9 per cent for investment trusts.

In the UK all-company sector, the five and ten-year figures for unit trusts were 45 per cent and 76.3 per cent, while for investment trusts they were 56.6 per cent and 86.1 per cent.

Why haven’t financial advisers recommended them more often?
For a combination of reasons. For years investment trusts suffered because they didn’t pay commission to financial advisers for recommending their products, whereas unit trusts did. However, a ban on commission payments three years ago removed that handicap.

More than 1,000 adviser companies buy trusts through platforms

There is also the fact that investment trusts are a more complicated product to explain. However, they are not that much more complicated and many financial experts would argue that they are worth persevering with for the potential performance. There may also be a degree of reluctance on the part of some advisers to deal with an unfamiliar product — and, until now the biggest adviser platform didn’t offer them.

Will the Cofunds move mean more advisers buying investment trusts?
It certainly should do, because it will enable a large number of advisers to buy trusts for their clients at the touch of a button — something they couldn’t do previously. There is still some concern among financial experts about the effect that a wave of money flooding into investment trusts could have.

Laith Khalaf, of Hargreaves Lansdown, the wealth manager, says: “We offer investment trusts on our Vantage platform, but we don’t recommend any individual trusts or promote them by including them in our Wealth 150 list. This is because of concerns about liquidity. You might have a small investment trust where the typical value of shares traded daily was considerably less than £1 million. If we were to put that trust on the wealth 150 list we might generate £20 million worth of buy orders. There might not be enough sellers to meet the demand, at least initially, the imbalance would push prices up sharply and it would take time to execute the deals.”

So lack of liquidity is a problem for investment trusts?
Not necessarily, according to Andrew Bell, the chief executive of Witan investment trust, who argues that Hargreaves is much bigger than most and its example is an extreme case. “What is true of Hargreaves is not true of other platforms or advisers,” he says.

Ian Sayers, the chief executive of the Association of Investment Companies (AIC), the industry trade body, says: “The deals that advisers transact on clients’ behalf tend to be small in relation to the quantity of daily dealing in an investment trust’s shares, especially for the larger, more high-profile investment trusts. The largest 25 per cent of trusts have daily trading in their shares worth more than £1 million a day.

“Liquidity can be more of an issue for large wealth managers. However, for your typical financial adviser using Cofunds, that’s unlikely to be an issue. If a company experiences a particularly large demand for its shares, it can issue new shares to meet this demand.”

Will investment trusts compete more aggressively with unit trusts?
They could, but unit trusts are capable of fighting back. The ban on commission, which has levelled the playing field between unit and investment trusts in terms of incentives to advisers, has also made unit trusts cheaper because it has stripped commission out of their charging structure. So investment trusts can no longer be sure that they hold the trump card of lower charges.

A new study by Tilney Bestinvest, the wealth manager, covering 47 pairs of unit and investment trusts, with similar mandates and from the same stable, shows that in 53 per cent of cases the charges on unit trusts are now lower than those on investment trusts.

Jason Hollands, of Tilney Bestinvest, says: “With unit trusts’ costs often lower than those of similar investment trusts, investors need to consider all factors. Costs aside, investment trusts have other valuable features, such as their ability to use gearing to enhance returns and the role of independent boards in overseeing their operations. One way trust boards can help is to drive down managers’ fees where they are no longer competitive.”

John Newlands, of Brewin Dolphin, the wealth manager, says global giants such as Witan or Scottish Mortgage will always appeal to long-term investors. Two slightly less well-known trusts that he thinks look attractive are TR Property and BlackRock Throgmorton trust. He says: “The TR trust stands at a 15 per cent discount to its real value and boasts a yield of 2.7 per cent. “The BlackRock trust invests in smaller companies which have fallen out of favour after the Brexit vote. The present discount of 20 per cent to net asset value looks frankly nutty to me. There is also a yield of about 2 per cent. ”

● Charles Cade of Numis Securities, the stockbroker, suggests Fidelity Special Values and the Worldwide Healthcare trust. He says: “The Fidelity trust invests in large and small companies and overseas stocks. Worldwide Healthcare provides exposure to pharmaceutical, biotech and healthcare stocks.”

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