Published: February 17 2011 14:08 | Last updated: February 17 2011 14:08
Investors looking for a lower-cost way to hold actively managed funds in an individual savings account (Isa) are being advised to consider investment trusts – but check certain key figures before investing.
Annabel Brodie-Smith, head of communications for the Association of Investment Companies, says these trusts can be ideal Isa investments as they are highly competitive in terms of charges, have independent boards of directors to look after shareholder interests, and can invest in a wide variety of assets – including private equity and hedge funds.
Investment trusts can also be easily bought for an Isa – in one of three ways.
Investors can buy an Isa wrapper directly from a fund manager – such as Fidelity, Aberdeen or JPMorgan – which will let them select holdings from the range of trusts managed by that group. Or they can buy an Isa from a single investment trust – for example, RIT Capital Partners, Personal Assets Trust and Scottish Investment Trust allow this route.
To do this, investors must pay either a minimum amount each month or a minimum lump sum. Henderson allows the lowest of each type of payment – at £20 for each, while Personal Assets Trust has the largest minimum requirements at £600 a month or £7,200 as a lump sum.
However, investors do not have to open a specialist investment trust Isa to hold these funds tax efficiently. Self-select Isas run by stockbrokers will allow investors to choose whatever mix of investment trusts and unit trusts they like.
Both The Share Centre and TD Waterhouse offer this type of Isa and the charges can be lower than buying direct from a fund manager. TD Waterhouse, for example, waives any annual administration fee on balances of more than £5,100 in its Trading Isa. Dealing costs will apply when investors want to switch funds.
But, before buying, there are some general checks to make. Investment trust shares usually trade at a discount to the fund’s net asset value (NAV), offering investors who buy in at a discount a potential uplift if the share price moves closer to NAV.
It is therefore worth checking whether the discount is higher or more narrow than usual.
Stephen Peters, investment trust analyst at Charles Stanley, warns that it is difficult to find value in investment trusts at the moment, as many trade on narrow discounts or even premiums to NAV.
Some income investment trusts, for example, are so popular in the current climate that their shares trade on premiums. Equally, investment trusts can trade at wide discounts to NAV for very good reasons. Investors must therefore carry out research in a fund’s price history before buying.
Investors should also be aware that not every investment trust has lower charges than a unit trust. In fact, the average total expense ratio (TER) for investment trusts recently rose above that for unit trusts – 1.8 per cent versus 1.6 per cent – because a lot of specialist trusts such as fund of hedge funds and private equity funds have higher charges.
Nevertheless, global generalist investment trusts that have been around for decades and have large assets under management often have TERs below 1 per cent – better than most actively managed unit trusts.
To help identify the best funds for different conditions, fund analysts have suggested a number of fund picks for this Isa season.
Simon Elliott, an investment trust analyst at Winterflood Securities, is pointing investors looking for high growth funds towards Scottish Mortgage and BlackRock World Mining. Scottish Mortgage focuses on long-term themes rather than short-term market expectations and is relatively volatile – which Elliott says makes it unsuitable for more cautious investors.
He thinks BlackRock World Mining is an interesting alternative to mainstream emerging market funds, given their correlation with commodity prices. He argues that the fund is well placed to continue outperforming the global mining sector index and is also on an attractive discount of 16 per cent.
Those looking for a more defensive global fund could try British Empire Securities, says Elliott. It currently holds 21 per cent in cash and should continue to deliver absolute returns over the long term.
Peters at Charles Stanley says Murray International is another global trust that is very popular with long-term investors – though it is strongly exposed to emerging markets and could struggle this year.
For those who want to invest in Europe, in the hope of a recovery in the eurozone economies, Peters recommends Jupiter European Opportunities and European Investment Trust.
And, for a more racy pick, Peters suggests Origo Partners, an Alternative Investment Market-listed Chinese private equity stock based in Beijing. The company invests in alternative energy companies in China and also has exposure to Mongolia.
Paul Locke, an investment trust analyst at Canaccord, offers a number of riskier tips. He likes Artemis Alpha, which he says has a proven track record for delivering above market returns.
He also thinks it is a good time for investors to start looking towards small caps, which could start to outperform. He suggests Montanaro European Smaller Companies or Montanaro UK Smaller Companies.
Locke also picks Golden Prospect Precious Metals for a commodities play.