Selasa, 26 Juni 2012

Unearth a hidden gem in the Far East with investment trusts

Unearth a hidden gem in the Far East with investment trusts

By Sam Dunn

PUBLISHED: 18:06 EST, 26 June 2012 | UPDATED: 18:06 EST, 26 June 2012

Enlarge   How investment trusts beat their rivals

Cut-price funds whose performance can put rivals in the shade are being woefully ignored by investors.

When most people seek a fund for their Isa, the vast majority pick a unit trust. This is because the companies which  run unit trusts pay hefty commissions and, as a result, are heavily pushed by financial advisers.

But rival investment trusts, which pay no commission, can be much cheaper and give you the same returns â€" if not much more â€" for your money.

Major investment trusts include the Templeton Emerging Markets fund, up by 97 per cent over three years, and Henderson Opportunities Trust, up by 83 per cent, according to fund analyst Trustnet.com.

Their profits have knocked the socks off rival unit trusts.

For example, if you’d invested £1,000 three years ago in the average investment trust that put your money in the Asia Pacific region, excluding the Japan sector, you’d have £1,651 today, fig ures from analyst Morningstar show.

In the average ordinary fund investing in the same region, you’d have £1,429 â€" a third less of a return on your money.

The big firms into which these investors’ money is flowing include Thai power company Glow Energy, South Korean travel operator Hana Tour Service, electronics giant Samsung, car maker Hyundai and banking giant HSBC, whose shares are listed on the Hong Kong stock exchange. The greater returns are largely because annual charges are 0.63 percentage points lower than in ordinary funds, according to research from Collins Stewart wealth manager.

It may not sound a lot, but it can knock hundreds of pounds off your profits every year.

Trusts can also borrow cash to boost the size of their investments and have a ‘two-tier’ pricing, which also helps to ramp up returns.

Part of the reason they have not been so popular is sheer lack of public awareness.

Commission-hungry financial advisers get large pay-offs from fund companies for selling their products â€" but not for investment trusts. These trusts, of which there are about 40 0, are also considered much more complex than regular funds, which simply buy shares in a range of companies or bonds with your cash.

An investment trust is technically a company, so in order to invest in the fund you need to buy shares in it first. As the fund itself is listed on a stock exchange it prevents you from being able to dip in and out, as you can with ordinary funds.

This has hammered their popularity. Since 2002, the value of the unit trust sector has ballooned by 142 per cent to £571  billion, according to Collins Stewart. By contrast, investments trusts have experienced sedate growth, rising by just a third to £90.3billion.

However, it had been hoped that new rules on financial advice would change all this.

From January 1, annual commission payments from ordinary funds must no longer be paid to advisers.

The Financial Services Authority City regulator hopes getting rid of such a temptation w ill convince advisers to recommend investment trusts more often. But there is growing concern that the trusts will remain stuck in an investment ‘ghetto’.

First, huge uncertainty about how many independent financial advisers (IFAs) there will be could curb their sale.

Simon Elliott, spokesman for Winterflood Securities, says: ‘Advisers may simply choose to ignore investment trusts, drop their label as an ‘independent’ adviser and opt to offer ‘restricted’ advice on a small range of funds instead.’

Second, those who run investment trusts have failed to adapt to the online world â€" making it impossible for ordinary savers to buy the funds on the internet.

Three major websites that used to buy and sell funds â€" Cofunds, Skandia and Fidelity â€" don’t offer access to investment trusts and have no immediate plans to change this for direct investors.
Gavin Haynes, of IFA Whitechurch Securities, says: ‘Sinc e many people like to buy funds online, as do most financial advisers, the sheer lack of online flexibility is harming their growth.’

The idea of buying and selling shares in an investment trust has long confused savers seeking a simple way to put money aside over the long term.

Like ordinary funds, savers in an investment trust pool their cash with others and hand it to a professional manager, who uses it to buy a huge basket of shares.

But that’s where the similarities end. Only a set number of shares  in the trust itself are issued,  limiting demand.

This either pushes up, or forces down, the price. So when the basket of underlying shares in which the trust is invested isn’t doing well, the clamour for it â€" and the price â€" will be reduced.

And when demand for the trust’s own shares is less than supply, it creates a so-called ‘discount’. It is a key part of a trust’s appeal, but requires saver s to take a very active part in their fund’s performance.

When an investment trust is trading at a discount, it offers investors a chance to benefit from two lots of growth â€" a possible rise in the trust’s own share price, as well as potential growth in the value of the basket of shares it’s invested in. Unfortunately, the double whammy can work in the opposite direction when markets are falling.

For lower-risk investors, Tim Cockerill, of wealth manager Rowan Dartington, recommends Aberdeen Asian Smaller Companies fund, while for those happy to take on more risk, he picks Schroder Income Growth fund.

Gavin Haynes, at Whitechurch, recommends Edinburgh Investment Trust for low-risk investors, and Templeton Emerging Growth for higher-risk savers.

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