DIY Investor Magazine
/
2015 Issue
28
FROM A SMALL CORNER OF THE MARKET:
INVESTMENT TRUSTS
Investors are likely aware there are two main
‘types’ of collective investment vehicles: open-
or closed-ended. Open-ended vehicles in the
UK are either called open-ended investment
companies (OEICs) or unit trusts, and otherwise
referred to as ‘funds’; closed-ended vehicles are
known as investment trusts.
‘Open-ended’ refers to the fact that when new
investors come along with money to invest, new
units in the fund are created and the fund grows;
similarly when investors want their money back,
the fund shrinks as the units are cancelled.
‘Closed-ended’ refers to the fact there are a
fixed number of shares in issue for an investment
trust, so in order for an investor to buy shares
another investor must be willing to sell. These are
transacted through an exchange.
Not needing to worry about potential
redemptions in investment trusts means fund
managers are able to buy more esoteric or
illiquid stocks because they don’t need to worry
about selling them to raise cash. This can be
very beneficial for investors, as John Bennett,
Fund Manager of the Henderson European
Focus Trust, writes:
These are not, as is sometimes thought,
investors who simply do the opposite of the
market but rather make up their minds on the
fundamental merits of an investment irrespective
of the crowd.
JOHN BENNETT ON SPECIAL SITUATIONS:
THE TRUST’S POWERFUL DIFFERENTIATOR
Over the years I have frequently discussed
the advantages investors enjoy when owning
investment trusts. Recently, I have been
reminded of these again. I am not overly
confident in the markets presently.
US equities, the forerunner for global risk assets,
are too highly valued. Political paralysis in the
Eurozone coupled with drag from financial
repression and excessive debt means relatively
low valued European equities are, in my opinion,
not actually that cheap. At times like these there
are unique positions in the Trust that give me
some confidence: the special situations.
For my large open-ended funds these stocks are
often inappropriate on account of being too small
and too illiquid; we simply couldn’t trade them
into meaningful portfolio positions nor use them to
raise cash quickly enough to fund any necessary
redemptions.
WHAT OTHER ADVANTAGES DO INVESTMENT
TRUSTS BRING INVESTORS?
1) More reliable income - The income you receive
may be more reliable than open-ended funds
because investment trusts are able to reserve up
to 15% of the dividends received from underlying
holdings, usually in times of economic prosperity,
and use this to help continue paying-out income
if times get harder and dividends become less
fruitful.
2) Independent board - Investment trusts have
an independent board whose job it is to keep
an eye on the fund manager’s performance and
ensure they’re keeping in-line with the investment
mandate, supporting or challenging them where
necessary.
3) Gearing – Investment trusts can gear – or borrow
extra money – which can significantly add to
performance if skilfully deployed in rising markets,
although being a double-edged sword it can
enhance loses in falling markets.
JOHN BENNETT, DIRECTOR OF EUROPEAN EQUITIES
AT HENDERSON GLOBAL INVESTORS MAKES THE CASE FOR INVESTMENT TRUSTS
In the closed-ended structure the absence of
capital flows means we do not have to worry
about these issues; there’s plenty of time to trade
the stocks and aim to get the best price for our
investors. While special situations are not a large
part of the portfolio’s strategy I do believe they set
the Trust apart from its open-ended counterparts.
I point to two representative positions.
