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| Investment Trust Secrets 1. Discounts can be a good thing. This would seem both obvious and simple. Why would you want to buy something at full price (as you do with open-ended funds priced on their asset value), when you can buy it for less? Investment trust share prices are set by supply and demand, with an elastic relationship to the asset price. Commonly, the share prices trade at a level lower than the asset value, allowing you to buy 100p of assets for perhaps 90p. As a result you can have more assets working for you to provide capital growth or a dividend income. This sounds good – and it is. Yet there seems to be an extraordinary amount of griping surrounding the whole idea of the discount, mainly by investors who have bought on a narrow discount, only to see their trust fall out of favour and move out to a wider discount. The industry as a whole has been under pressure to reduce the variation in the discount – ‘discount volatility’ in the trade jargon – and has as a result instituted a whole string of strategies to achieve this. Share buybacks are now common, as (increasingly) are tender offers, and if the efforts of the trust itself fail to work then there are active arbitrageurs within the sector who can put pressure on the trust to reconstruct or otherwise act to create shareholder value. 2. Boards have become more independent. Indeed it is a requirement of the industry’s new code of corporate governance that a majority of the directors must be independent of the manager. Changes brought in after the split-capital crisis which afflicted the industry have removed any vestiges of cosy relationships and vested interests. Boards have been exercising their powers to sack managers and institute change where necessary, looking after the interests of their shareholders. 3. They’re battling the taxman. Unless you are already an aficionado of the industry you are unlikely to have heard that investment trusts are locking horns with Customs & Excise over VAT. The industry’s trade body, the Association of Investment Trust Companies (AITC) has joined with one trust – JPMorgan Fleming Claverhouse – to challenge Customs & Excise over the charging of VAT on management charges. Management fees for open-ended funds are free of VAT, as are those for investment trusts investing outside the EU. However, trusts investing in the UK and Europe have to pay up at an estimated cost of up to £30m a year. The legal challenge could result in a large annual saving for shareholders, and illustrates the benefit of the industry having an active and well-staffed trade organisation working on its behalf. 4. New issues can be an attractive entry point. Investors are often suspicious of new issues, but in these tough markets investment trusts are marketing to an extremely sceptical audience of sophisticated investors who know full well that they can buy existing trusts at a discount. To persuade these investors to pay a full price for assets at launch, new issues need to be of a high quality. Often they will offer access to an asset class or a type of investing not previously available, or where competing trusts are trading on high ratings. New issues frequently trade at a premium after launch. 5. Their costs are low. Put simply, investment trusts are cheaper to invest in, and their running costs are low. This can be important as charges can eat into long-term returns. An independent study back in 2000 conducted by Fitzrovia International, leaders in investment fund expenses research, revealed that the size-weighted average Total Expenses of retail equity unit trusts and OEICs were 60% higher than the size-weighted average Total Expenses of investment trusts in a comparable universe of funds. Much the same would be true now.
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Warning: you should
not buy shares or warrants with money you cannot afford to lose. This
web site is intended for UK investors. Options and other derivatives,
warrants, and margined transactions. This warning notice draws your attention
to some of the high risks associated with warrants. The risks attaching
to instruments and transactions of this kind are usually different from,
and can be much greater than, those attached to securities such as shares,
loan stock and bonds, such transactions often having the characteristics
of speculation as opposed to investment. Warrants may involve a high degree
of 'gearing' or 'leverage'. This means that a small movement in the price
of the underlying asset may have a disproportionately dramatic effect
on your investment. A relatively small adverse movement in the price of
the underlying asset can result in the loss of the whole of your original
investment. Moreover, because of the limited life of warrants, they may
expire worthless. A warrant is a right to subscribe for shares, debentures,
loan stock or government securities, usually exercisable against the original
issuer of the securities. Because of the high degree of gearing which
they may involve, the prices of warrants can be volatile. Accordingly,
you should not buy warrants with money you cannot afford to lose. You
run an extra risk of losing money when you buy shares in certain smaller
companies including ‘penny shares’. There is a big difference
between the buying price and the selling price of these shares. If you
have to sell them immediately, you may get back much less than you paid
for them. The price may change quickly, it may go down as well as up,
and you may not get back the full amount invested. It may be difficult
to sell or realise the investment. Because of the volatile nature of the
investment, a fall in its value could result in your recovering nothing
at all. Changes in rates of exchange may have an adverse effect on the
value or price of the investment in sterling terms. As with other investments,
transactions in warrants, shares, and investment trusts may also have
tax consequences and on these you should consult your tax adviser. We
have taken all reasonable care to ensure that all statements of fact and
opinion contained on this site are fair and accurate in all material respects.
Investors should seek appropriate professional advice if any points are
unclear. This site is intended to give general advice only, and the investments
mentioned are not necessarily suitable for any individual. It is possible
that the McHattie Warrants Alert Fund or officers of the McHattie Group
may have a beneficial holding in any of the securities mentioned. Published
by The McHattie Group, Clifton Heights, Triangle West, Bristol, BS8 1EJ.
© 2005. Tel: 0117 925 8882. Fax: 0117 925 4441. E-mail: mchattie@tipsheets.co.uk.
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Securitised Derivatives:
these instruments may give you a time-limited right to acquire or sell
one or more types of instrument which is normally exercisable against
someone other than the issuer of that investment. Or they may give you
rights under a contract for differences which allow for speculation on
fluctuations in the value of the property of any description or an index,
such as the FTSE 100 Index. In both cases, the investment or property
may be referred to as the “underlying instrument.” These instruments often involve a high degree of gearing or leverage, so that a relatively small movement in the price of the underlying investment results in a much larger movement, favourable or unfavourable, in the price of the instrument. The price of these instruments can therefore be volatile. These instruments have a limited life, and may (unless there is some form of guaranteed return to the amount you are investing in the product) expire worthless if the underlying instrument does not perform as expected. You should only buy this product if you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges. You should consider carefully whether or not this product is suitable for you in light of your circumstances and financial position, and if in any doubt please seek professional advice. |
