Trusts regain their sparkle
INVESTMENT trusts have bounced back strongly from the horrors of 2001-3, when markets slumped and the split-capital scandal erupted.
Though the sector fell 16% in five weeks in May/June, four out of five actively managed funds have beaten their benchmarks over three years, says Alan Brierley at Dresdner Kleinwort.
The population of trusts has changed with new funds offering property and 'funds of hedge funds' while the global 'generalists' are on the wane and underperforming funds in all categories are being weeded out.
Investment trusts have their snags. Their share price bears some relation to the value of their assets but is basically determined, like any other share, by the degree of demand in the market. Some smaller funds in less fashionable sectors still sell at 20% below asset value. But nowadays this tends to attract predators and spark off action to narrow the discount. Across the sector, the average discount is 7%.
One advantage is that you can buy or sell freely in the market, paying only the normal broking charges. There is no initial levy of up to 5% as with some unit trusts.
Another is costs; some of the big funds' management charges are as low as 0.5% per year, below unit trust levels (though charges in private equity and hedge fund trusts are higher). Historic performance outshines the unit sector, but because investment trusts do not make much money for financial advisers, their attractions remain unsung.
For ordinary investors, though, they are a convenient and cheap way of spreading risk, and gains and dividend income can be sheltered in a Pep, Isa or Sipp.
Which trusts have been performing best?
According to Dresdner Kleinwort's review, which covers January to June and is based on asset values, and the latest update from Winterflood Securities, which runs to July and is based on share prices, the best performing sector in the first half was mining, with gold investor Resources IT topping the table, and Merrill Lynch World Mining ahead 16%. Both have been tipped here. Resources also tops the Winterflood table.
Property has also risen strongly this year, the best performer in share terms being UK Balanced and in asset terms Westbury.
Not everyone is winning. Sector giant Foreign & Colonial is making efforts to lift its performance, but is still struggling. It spent £162m buying back its shares this year, which helped, and outsourced its investment to other managers, which has not helped much so far. Witan, another widely held fund, also had poor initial results from outsourcing.
In happy contrast, funds run by Investment Extra guest writers have done well. Colin McLean's SVM Active is in second place in Dresdner's UK growth category; SVM Global (which I hold) tops the 'fund of funds' table. John McClure's Acorn Income heads the income sector. Gartmore Irish Growth (which I hold) run by Gervais Williams, tops its sector, with assets up 11.7%, though New Star did better in share price terms with an 18% gain.
The global growth tables were topped by Majedie, up 10.7%, one of those strange beasts you sometimes find in this sector; once a rubber plantation company, now an investment group with a growing fund management-side. It has done less well in the last three months.
Funds of hedge funds have seen a big inflow of money, but failed to match the FTSE All Share's 6.1% first-half rise. Two funds, from CMA and Goldman Sachs, raised £500m in July; it will be interesting to see if they do better.
The worst first-half performers were Japanese funds, as the Tokyo market fell. Other Asian markets did better, with Pacific Horizon (another of our tips) up 12% in six months. All in all, trusts are doing well and can still do a useful job for private investors.
Per
Which trusts are good value now? Perpetual Income & Growth, run by Mark Barnett, has a good track record and has often traded at a premium to its assets. At 238p it is at a 4% discount to fully diluted asset value. Charles Cade, the trusts guru at Winterflood Securities, says: 'This is a short-term opportunity.'
He also likes Throgmorton Trust (157½p), a small companies specialist which also has a solid track record. The yield is a modest 1.1%, but asset value is 183p, putting the shares on a 14% discount.
Dresdner Kleinwort's model portfolio includes JPM Fleming Mercantile, a £1.3bn fund that has been around since 1884 and is at an 8% discount, with a 2% yield.
Some think property funds are no longer good value after a sharp rise this year, but over the long term you should have one in your portfolio. You could also include a tracker fund as a cheap way of playing the market.
Tribune UK Tracker sells at 644p, though its assets are worth 670p. The dividend yield is just over 1%.
• THE share slump at Asia Energy - suspended after falling from £9 to 118p - shows the perils of one-prospect exploration. AE, written about but not tipped here, is struggling to salvage its Phulbari coal prospect after protests led to a ban on open-cast mining.
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