This article was produced by our sister publication Moneywise.
By Cherry Reynard | Fri, 02/12/2011 - 10:44
Article from Interactive Investor
This year has been a busy one for the investment trust sector. Market volatility is forcing many trusts to take a more global outlook, while the launch of junior individual savings accounts (JISAs) in November is also of interest to trust managers. But what's in store beyond 2011?
A long-standing criticism of the sector has been the unpredictability of discounts. This has led to some hair-raising situations for investors in the higher-risk trusts, where the value of a trust's holdings (the net asset value or NAV) has fallen 30%, but the share price discount to NAV has widened much further, creating a double hit.
But there are signs of a longer-term improvement in the discount problem after Alliance Trust (ATST), the UK's largest trust, succumbed to pressure from major shareholder Laxey Partners and agreed to buy back some of its shares in an attempt to narrow the discount.
Nick Greenwood, manager of the Miton Worldwide Growth Investment Trust (MWGT), says this has been important for the wider sector: "Once Alliance Trust had been bullied into a buyback programme, this influenced the discounts on other trusts."
New direction
There is also momentum among some trusts to improve performance. For example, Andrew Bell, chief executive of the Witan Investment Trust (WTAN), reports significant changes.
"Over the past 12 months, we have moved away from index investing, towards more cross-border stockpicking and conviction-led managers. We have also increased our exposure to emerging markets," he says.
A number of other trusts have also sought to become more global in their approach. Edinburgh Investment Trust (EDIN), managed by Neil Woodford, voted to increase the level of global investment from 15% to 20%. The Securities Trust of Scotland (STS) moved from a UK to a global income mandate, and Blue Planet International Financials (BLP) also sought to extend its geographic reach.
Peter Hewitt, manager of the F&C Managed Portfolio trusts, says performance in the sector has generally held up well. "Over the past year, investment trusts have done a little better than the FTSE All-Share. The discount control mechanisms have helped: trusts have been prepared to repurchase shares. The sector has benefited from having more overseas exposure and more mid and small-cap exposure, which - up to the beginning of August at least - was the right thing to do," he says.
Investment trusts have generally had lower weightings in the troubled sectors of banking and mining. New issues have focused on either niche areas (for example, the Macao Property Opportunities trust invests in the Macao gambling region of China), or on income. Henderson has launched an International Income trust (HINT); Midas a Diverse Income trust; and Aberdeen an Asian Income fund (AAIF).
Fee change
Performance fees have long been contentious. Two of the major trusts abolished their performance fees over the past 12 months: one of them, Foreign and Colonial Investment Trust (FRCL), also changed its base annual management fee from a fixed sum to 0.365% of market capitalisation.
The Schroder UK Growth Fund (SDU) was the other fund to terminate its performance fee, at the same time increasing its base management fee to 0.65%. The basis on which that fee is calculated has been amended too so that management fees are not paid on assets financed by borrowings.
These are relatively subtle changes, but should make investment trusts more palatable to a wider audience.
However, it's not all progress. Smaller and more illiquid trusts still remain on very high discounts in some cases. Areas such as private equity have not yet recovered from the credit crisis. The retail distribution review (RDR), which will mean that advisers can no longer receive commission for their recommendations, will help some trusts, but there are areas of the market that may be left behind.
And in the run-up to RDR (to come into effect in January 2013), there will be interesting times ahead. At present, independent financial advisers receive minimal commission from investment trusts compared to unit trusts, and as a result don't tend to recommend them. The upshot of RDR is that commission will no longer be on offer so investment trusts will be on a more level pegging with unit trusts and stand to be big winners in this rule change.
So the investment trust sector is looking sharper: large trusts are shifting to sustain or improve performance, discounts are moving in and the charging structure is becoming tighter. It may not be universal, but it is generally good news for existing and potential shareholders, who can expect a leaner and more dynamic sector in the future.
Investment trusts embracing JISAs
Investments trusts have long been at the forefront of children's saving: low minimum investment levels suit cash-strapped parents. Also, with an 18-year time horizon, the impact of the lower charges for investment trusts is more meaningful.
The majority of the large global growth investment trusts offer structured children's savings plans, such as Jump from Witan, where minimum investment levels start at just £25 per quarter.
Unsurprisingly, therefore, a number of investment trust providers expect to launch Junior ISAs either this year or next. Witan has been the first to throw its hat into the ring, with the launch of its Junior ISA plan in November. Baillie Gifford, F&C, Fidelity, Henderson and JPMorgan have so far also committed to offering JISAs, and other groups are expected to add their names to the list.
The JISA is likely to be a more popular structure for fund management groups than its child trust fund (CTF) predecessor. Whereas the old CTFs had restrictions limiting the range of products that they could be invested in, investors have a far larger range of investment options with JISAs.
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Article from Interactive Investor
