Why do we like investment trusts? – MoneyWeek Investment Tutorials



so in this video we're going to take a look at investing in funds and we're going to look at one type in particular the investment trust and explain why we generally prefer it to its main rival the unit trust so as an investor why do I want to fund after all I could go out and just buy shares individually build up a portfolio of 10 20 or 50 and manage it myself well a fund of course simplifies things I just hand my money to a fund manager in return for a set number of units or shares depending on the investment and then they take care of investing my money for me and that means I have less administration I'll pay of course the fund manager to do the job now I hopefully get if you believe the advertising the benefit of their expertise in a particular market the question then is if I want to buy a fund what do I buy before we kick off with investment trust specifically and the reasons why we tend to prefer them at money weak to the unit trusts which are their main rivals in many ways what types of fund are there well essentially there are two basic types so called actively managed and the ones which are passive I'm really today we're focusing on actively managed funds and what we're saying is that although not all of them are actively managed a big part of the industry is unit trusts and slightly less well-known are the ones we like the investment trusts or to give them their full title investment trusts companies now active management does what it says on the tin this suggests that I'm paying a fund manager or director to actually make investment decisions on my on my behalf and I'll pay them for it a passively managed fund on the other hand simply tracks an index or sector let's say and there are quite a few exchange-traded funds that do exactly that or ETX now this is a slight simplification I mean there are passive unit trusts around but today we're going to focus on actively managed funds which tends to keep you over here in another video we'll take a look at exchange-traded funds which are mainly trackers or passive and some of the pros and cons of those so what is it about investment trusts the we think often makes them more attractive than unit trusts number one cost and that's a very important one for investors you don't want to be throwing away more money than you have to every year on charges that's going to eat into your returns and eat into what your fund is eventually worth so the problem with unit trusts is they are allowed to spend an awful lot of money on advertising and many of them do when you see an advert on the tube or on a bus or in a magazine chances are if it's a fund it will be chant some kind of unit trust and that's fine but the problem is of course that that's got to be recovered somewhere all that advertising spend all that marketing spends got to come out somewhere and lo and behold it comes out of your money so although investment trusts companies are often seen as the kind of inferior twin if you like they're they're not often as widely marketed because they're subject to restrictions imposed on companies nonetheless charges tend to be lower the charging structures are different which can make it a little bit more difficult to make the comparison unit trusts initial charges for 5% often rebated through a fun supermarket annual management fees than sometimes exit fees investment trusts companies typically you've got the bid to office spread on the shares and you've also got an annual management fee but taking all those into account usually for similar investment objectives an investment Trust is the cheaper option so that's one reason why we quite like them number two there is the possibility with an investment trust that you might pick it up at a discount to its net asset value discounts of 10% or more are quite common and that's not something you get with the unit trust and that simply comes down to the way that these things are priced for a unit trust basically what a fund manager will do is come up with a net asset value for the investments that he or she controls and I'm going to put of a random and obviously small figure on that of 100,000 sterling so that's the nav of the fund derived by looking up the prices of all shares in the portfolio at say the end of the day and then the fund manager will look at the number of units in issue so in very simple terms let's say there are a hundred thousand units they've been sold to investors and you will expect and with the unit trust you'd normally see that those units are worth let's say one pound each so a hundred thousand times a pound is one hundred thousand in other words this valuation is directly driving that unit price and that's a feature of unit trusts which means you don't have the opportunity to buy them at a discount and it has it value what does that mean well with investment trusts here's the point they're actually companies and as companies they have publicly quoted and traded share prices and that means that that one pound is by no means automatic for example if this is an investment Trust Company the corporate director might well look up the fund manager might look up what all the assets in the fund or worth come to the conclusion that's a hundred thousand pound that open market value and then as an investor you might look up the open market share price because with an investment trust despite the name this is a listed company on the London Stock Exchange with a quoted share price so you might look up the share price and slightly cure surprise let's say it's ninety P so the market capitalization of this thing at the stock exchange is more like 90,000 in other words the whole thing is trading in terms of it the shares that it's issued to investors but a 10% discount to the value of its underlying the assets and that discount is quite attractive by the right investment trust company and effectively you're going to get its future performance in terms of that nav going up hopefully plus you may see the gap between its market capitalization and the assets that it owns and controls on your behalf narrowing so in other words you can end up with a nice little boost to the returns you get from the investment trust and that's just not possible with the unit trust and another thing we like about investment trusts stems from what I've just said and it's this investment trust companies are listed at the London Stock Exchange you can check out the share price every day you can look it up on the usual terminals and screens and so on and that means that investment trust companies are I'm going to rather grandly call continuously priced in other words if I want to sell my shares in an investment trust company I can do it at eleven three four as long as the markets open fine it's like selling shares in Tesco or Bibi I look up the ticker up I go unit trust not true unit trusts are not listed you can't buy and sell them on the on the London Stock Exchange you need to get a valuation of your units from a fund manager and they may only let you do that once or twice a day you may have to wait for a unit valuation and that can be a little bit frustrating as an investor the liquidity on an investment trust is often that little bit better now it's a long-term investor you might say I'm not that bothered but it's another factor that just makes investment trust companies a little more open let's say and finally gearing because investment trusts are actually companies they are allowed to borrow just as other companies are allowed to borrow now unit trusts can borrow – but regulations stipulate much tighter control often over the amount they can borrow and for how long and gearing if you pick the right investment trust company is a good thing it enhances returns and here's how just to take that final point on gearing let's say we have an investment trust company and a unit trust make up some very very simple short balance sheets so total net assets 100,000 sterling total net assets 100,000 sterling very simple numbers obviously too small to be realistic in the real world but that's fine funding so assets 100,000 in both cases funding the investment Trust Company is 50% funded by equity that's people buying its shares and 50% funded by debt see your assets of 100,000 funded by a mixture of shareholders and external debt coming 200,000 to the unit trust also has assets of 100,000 but because it's not allowed to borrow all equity funded and by that I mean that the money's been put in by unit holders investors okay so far so what so what's my point the point is this let's imagine that these two have a tremendous year assets under management double so a year later revaluing the net asset value that's gone to 200k and that's gone to 200k as well okay here's the point as an equity investor which one would I rather be in and the answer is the investment Trust Company because as an equity investor here your money's been doubled if the unit trusts were liquidated tomorrow in theory anyone who put money in here has seen it double over here even better still if the investment trusts were liquidated tomorrow 200,000 pounds of investment sold 200,000 pounds of cash let's say to clear the debt that leaves 150,000 down here in other words the initial 50,000 from last year has become 150,000 and that's a bigger return on equity investment so gearing in an investment trust company assuming you pick the right one and enhance returns the problem of course is the whole sector got tarnished by the split capital investment trust crisis a few years back where of course the exact reverse happened a heavily geared investment trust company can wipe out your capital much faster than a unit trust so we like investment trust companies at money weak they often don't get the attention of unit trusts and that's partly because they're not as heavily marketed but the four reasons we like them cost open they're cheaper than the equivalent or virtually identical you trust secondly there's the opportunity to buy them at a discount and asset value that's not something you get with unit trusts thirdly continuous pricing makes them that little bit more flexible a little bit more open and fourthly gearing not always a good thing but certainly is provided you pick the right investment trust company

4 thoughts on “Why do we like investment trusts? – MoneyWeek Investment Tutorials

  1. Am so lucky i contacted mr williAms on the right time,i whould have given all my money away to those scammers,but when i saw people's comments about mr williams,i gave him a try and he help me with his strategy,mr williams you are the best i have ever seen,you have been doing it for other people and you did it for me thank you so much sir.

  2. Hi Tim, have been reviewing your videos lately. Still find them useful when i started a job related the industrial. I am just wondering, are all the videos a one-man show? Or someone was helping you there for the shooting? Again, thank you for the great lectures.

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