Why to trust in investment trusts

Alastair Smith of Frostrow Capital explains why investment trusts should start to feature more heavily in your clients’ portfolios.

While there are still a number of questions advisers are waiting for the FSA to answer on RDR, one area on which the regulator has been very clear is that under the new rules “independent” will be a function of the range of products advisers can comment on.

This is a significant shift from the present understanding of “independent” which is a function of not being tied to any one company and offering products from a number of different providers.

What this means is advisers that wish to be “independent” post-RDR will need to understand, analyse and recommend all of the products available in the market, inclusive of investment trusts, as well as open-ended funds and ETFs to clients.

Focus will be on the best tool for the job and it seems fair to suggest cost will also remain an issue; the pressure on and criticism of investment management fees remains and, if we are indeed set for a period of stagnation or low growth from G4 countries, it is fair to expect this pressure to continue.

Investment trusts are not presently in vogue with the majority of financial advisers, although they have their fans, particularly in the wealth management community.

Fans of investment trusts like them for a number of reasons, not least the fact that the average annual management charge for an investment trust is lower than that of an equivalent open-ended fund (see table below). Investment trusts can also offer access to managers that smaller investors would not otherwise be able to invest with, such as OrbiMed Capital.

Discounts

Discounts, off-putting for many, are another attraction for fans of closed-ended funds that see discounts as an opportunity to access a strategy and track record at an attractive price.

Naturally this does not apply to all investment trusts with wide discounts and this additional level of analysis can be off-putting. However it can provide growth investors with attractive opportunities, in particular where discounts narrow as sentiment improves.

Investment trusts should provide investors with access to interesting strategies and markets, with the closed-ended structure providing a level of liquidity and security for investors. 

Over the next few years it seems growth, at least in the medium to long-term is more likely to be driven by emerging market economies than the developed world markets. Closed-ended structures are also favoured by emerging market investors for similar reasons.