ONE of Scotland's greatest strengths in fund management is its major presence in the investment trust sector. Powered by a great historical legacy and continuing innovation, Scotland is home to the biggest investment trusts in the market and many of the most successful specialist funds.
In a volatile and uncertain world, investment trusts provide choice, greater transparency and lower charges and fees than a unit trust counterpart.
I have always strongly believed that for anyone starting out on long-term investment or for those
looking for niche funds to diversify a core portfolio, investment trusts should be the first stop choice. An investment trust comes at significantly lower cost in fees and expenses compared with a unit trust bought through a wrap platform. The investment skills are up with the best. The annual report disclosure on where your money is invested, what the managers are doing and why is immeasurably better than that from a typical unit trust. Investment trusts also have the ability to borrow and gear up to take advantage of a rising market. And they have the advantage of independent boards of directors to hold the investment managers to account.
That said, investment trusts can be prone to greater volatility when markets take a dive, as they did last year. Highly geared trusts and those offering high income suffered falls of more than 40 per cent on average last year due to their geared exposure to banks and other sectors where dividends were cut or passed altogether. Discounts to net asset value yawned out to 19 per cent on average – and often to 40 per cent and more in the case of specialist property and venture capital trusts.
Some felt the investment trust model, up against increased competition from exchange trade funds, would struggle to make good the damage. But since the dark days three months ago, there has been a powerful recovery.
The average discount to net assets has tumbled to 9 per cent. Since the market turned in early March, the FTSE All-Share is up 28 per cent and has risen 4 per cent over the year to date. So far in 2009 the investment trust sector outperformed, with a rise of 14.3 per cent.
However, the strong rally of the past two-and-a-half months has by no means convinced investors they should rush back in. Indeed, it has presented a conundrum for professional fund managers: should they try and play catch-up and chase cyclical stocks, given the risks of setback and profit-taking over the months ahead? Or should they stay in defensive sectors and risk losing further ground as a wider recovery gathers steam?
That was the backcloth to this year's Association of Investment Companies (AIC) Scottish roadshow, held last week. The event, supported by groups including Baillie Gifford, JP Morgan, Aberdeen Asset Management, Foreign & Colonial and Witan Investment Management, drew around 160 investors. Key speakers were the accomplished stock market veteran analyst Brian Tora, new kid on the block Sebastian Troy (recently appointed manager of the keenly followed Personal Assets Trust), and Hamish Mair, manager of the F&C Private Equity Trust. The proceedings were ably chaired by Annabel Brodie-Smith, Communications Director of the AIC.
A lively question and answer session brought forth searching queries from the audience, ranging from recent regulatory issues with the European Union through corporate governance and control of bankers' bonuses to how to cope with inflation.
The final question – with the caveat that the answers did not constitute investment advice and were purely personal views – was which conservative and which adventurous trusts would the panellists choose for their ISA.
Mair opted for Alliance Trust as his conservative choice and the specialist private equity specialist Candover as his adventurous choice. Troy opted for Personal Assets Trust (20 per cent liquid, 9 per cent in gold) for his conservative choice and Artemis Alpha. Tora went for Scottish Mortgage as his safety choice and Aberforth Smaller Companies. Yours truly opted for Monks Investment Trust and Schroder Oriental Smaller Companies.
Mair's presentation was of particular interest as it focused on a private equity sector that has been badly mauled over the past year but which is likely to feature among the best performers when the upturn comes.
This is classic investment trust territory and an area where trusts can play an invaluable role in both providing investment management expertise through market appraisal and diversification of risk across a range of specialist funds. In view of the importance of this sector I will be devoting a separate column to Mair's presentation in the next few weeks.
• For more details on the Association of Investment Companies, visit
www.theaic.co.uk or contact
Annabel.Brodie-Smith@theaic.co.uk.
