Investment Trusts for client portfolios

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  • 39 mins 08 secs

Learning: Structured


  • Simon Moore, Senior Investment Manager, Seven Investment Management
  • Neil Mumford, Director, Milestone Wealth Management

Learning outcomes

  1. How investment trusts can fit in with a client's capacity for loss and attitude to risk
  2. The role of closed end funds as providers of long-term income
  3. The availability of investment trusts on platforms
Channel: Investment Trusts
London • Harpenden
Tel: +44 (0)1582 764000

New York
Tel: +1 212 661 4111

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Learning outcomes:

1. How investment trusts can fit in with a client's capacity for loss and attitude to risk
2. The role of closed end funds as providers of long-term income
3. The availability of investment trusts on platforms

SIMON MOORE: I’m Senior Investment Manager at Seven Investment Management. I’m also on two committees of the AIC. That’s the Association of Investment Companies. I look at the stats committee to make sure all the numbers are coming out correctly, and I’m on the property and infrastructure committee as well.

PRESENTER: And your role at 7IM, typically what does that involve?

SIMON MOORE: I help out on fund selection, particularly on investment companies, investment trusts. We’re looking at the moment at property, private equity and the senior loan funds.

PRESENTER: And Neil, as an adviser, how do you use investment trust, why do you use them for clients?

NEIL MUMFORD: We like the merits of investment trusts. So we’re a small bespoke IFA and we manage client portfolios on an individual basis. We see merits of investment trusts as adding value over and above unit trusts in that we can buy into investments close-ended. So there’s no pressure on the manager to have to sell holdings at any particular time.

PRESENTER: And when it comes to investment trusts are you buying mainstream trusts or?

NEIL MUMFORD: In the main, we avoid the specialist type of trusts. We don’t have the expertise to research those. We prefer to recommend investments that we know and we understand. So generally tend to be the big general trusts, the very, very large liquidity, you know typical funds such as Bank of Scottish American, City of London, dividend heroes as they’re known as.

PRESENTER: And we hear a lot from the FCA about a client’s capacity for loss, their risk appetite, how do you square that with using investment trusts?

NEIL MUMFORD: I think it’s fair to say that investment trusts are riskier than their trust equivalents. Basically because they are tradeable assets, and they’re obviously trading, they can trade at a premium or a discount. So you’ve always got supply and demand issue that means that at any one time if markets are stressed you will actually see the value of those trusts move in a more negative way than perhaps a unit trust equivalent. But also you have the benefits of price rises. And the other way where a trust is actually popular and people want to buy it, pushing it to a premium, so you have the benefits of the markets going up and also the benefits of that trust being pushed to a premium. Now clearly that presents potentially more risk to a client, but we typically only have 20 to 25% of a client portfolio maximum in investment trusts. So we can minimise that risk by having the rest of the portfolio in unit trust equivalents.

PRESENTER: Simon, now Neil’s touched on some of the benefits there of an investment trust, but is all that extra work worth it when there’s, I guess, potential for corporate actions and all sorts of equity like behaviour, or direct equity behaviour around the edges?

SIMON MOORE: The corporate action is actually the chance for shareholders and therefore clients engaging with the board and the management of the investment trusts. So that’s actually a very powerful synergy between an investor and the running of the fund. The open-ended funds, if you look at the pink pages in The FT, the listing of the open-ended funds goes on for pages and pages and pages. There are so many of them, there’s actually no actually reason for shareholders to wind them up, or fund managers, as long as they’re making money for the fund management company. Investment trusts, there’s only about 450. It’s a much healthier sector because part of the engagement of the corporate governance we’re talking about is actually a positive sector.

PRESENTER: And, Neil, just going back to this issue about risk, how do you work out which investment trusts to buy for clients and in which sort of proportions, once you’ve worked out what clients’ attitude to risk is?

NEIL MUMFORD: As I say, we’re focusing mainly on the mainstream trusts, and all we can do is look at the long track records that these companies have. So in the main my clients are retirees. So we’re focusing on generating income for those clients. One of the big benefits of the investment trust over the unit trust equivalents are the rising dividend streams, and we’ve now got more than a dozen companies that have increased their dividends for more than 30 years. There’s a fair amount of certainty that they will continue. So we’re focusing more on those types of trust that have got the long track records. And generally what we’re also finding is that those companies have actually got long track records of dividend increases have also got fund managers that have been with that trust for a very long time. So we’re not focusing on whether that manager is top of the pops and best in his sector, we’re looking at the objectives of the trust itself and whether it’s going to meet the objectives of our clients.

PRESENTER: And at 7IM, Simon, how are investment trusts used or made available to clients there?

SIMON MOORE: We only have sort of a pooled fund of funds. So actually we at the investment management team can actually buy and sell investment trusts at our own within the team level for the benefit of the fund and clients hold units in our fund of funds. So the clients, we don’t have to be buying and selling the individual investment trust for clients. There isn’t a standard buy list for clients; it’s all sort of in our collective schemes.

Going back to the attitude to risk, I think on the open-ended funds, there’s a key investor information document - a KID - which has got a score that says, there’s a handy number there, so you can actually show that to the clients and say this is a score four, this is a score five. So that might be what the client signed up for. And from January next year the investment trusts are going to have follow this with a KID under the new MiFID Rules. There will be a fact sheet equivalent which is going to have a little sort of scoring mechanism on it so you can actually match that level to the client’s attitude to risk. The details are not yet known but.

PRESENTER: But essentially you will be able, whether it’s an open or close-ended fund, there should be a scoring of, there is a…?

SIMON MOORE: Required scoring by European rules, love ’em or hate ‘em. But otherwise as I say you have to resort to the scoring agencies, which I think we may come onto later on and some of the, I know Citywire do a very good sort of scoring. There’s no otherwise broker, Edison do some sort of research on funds, but otherwise an individual score for investment trust or Morningstar score is not so easy to come by.

PRESENTER: And we’re looking as we talked a bit about attitude to risk but what about capacity for loss? If you’ve got, Neil, a lot of clients that in retirement and obviously they’re looking for the income, but how big a concern is it for, the sort of fluctuation, the capital value of what they’ve got?

NEIL MUMFORD: You’ve got to look at the portfolio as a whole at the end of the day. So if we are building a portfolio, let’s say we’ve got 20-25% of the portfolio in the investment trust, we are well aware and the clients are well aware that in bear markets those investment trusts will fall harder than the unit trust equivalent in the main. It’s also about meeting clients’ expectations and making a client understand the level of income they actually can generate from a portfolio. So the investment trust will be the last investments that we would sell in a market downturn.

One, our portfolios, we always typically keep about 5% of the portfolio in cash, and that pays for income and for fees, and typically it will pay for at least fees and at least one year’s worth of income. And that can rise up to 5 to 7 to 10% in certain areas. But we’ve also got lower risk unit trusts. So we would sell those first if we needed to raise the cash levels. So we’re never concerned with market volatility. It’s a fact of life that we are going to get market volatility and it’s how we manage that risk for clients in the overall portfolio.

SIMON MOORE: And certainly from the funds which actually investment trusts, investment companies actually pay out the dividends, there’s a general sort of smoothing of volatility anyway, because it’s the income support and the dividend yield you’re buying rather than the NAV.

NEIL MUMFORD: That’s right. I mean we saw in 2008 some of those investment trusts fall by 40% in value. While, you know, buy and hold strategy, which I feel is the way investment trusts should be bought, would have proved that had you held your nerve and just kept invested, one, as Simon says, you’ve received a good level of income and a rise in income, and two you’ve also benefited from capital growth over that period of time. So investment trusts for us are holdings that we buy for clients for a long long time. We’re not dipping in and out the markets at all; we’re looking at them as long-term holdings.

PRESENTER: And Simon, do you think that an investment trust, the typical period for an investment trust for an investor should be longer than for an open-ended fund or?

SIMON MOORE: Not, I don’t think, not particularly. In the same way that there’s, just because an open-ended fund has got a, is daily dealt in that the price might be different. I think all collective investments should have a long-term view. You’re not buying a single equity on a takeover whim that maybe will, you know, if you like what’s happening at, Mobil at the moment being taken over, quick uplift. I don’t think the investors, for the retail client it shouldn’t be, any sort of investment shouldn’t be in the short term anyway.

PRESENTER: And just on this point of liquidity and investment trusts, how easy it to treat customers fairly if you’re putting them into investment…?

SIMON MOORE: Well our solution at 7IM was to only have our investment companies in our fund of funds. So we, as the investment management team, we’re either buying or selling through our dealers, but clients just have units in our fund of funds, so they don’t see any sort of problems.

PRESENTER: And has your, your fund of funds, has that got open-ended and closed-end funds?

SIMON MOORE: Oh yes and ETPs, trackers and currency hedging and things in it aswell.

PRESENTER: OK. So they’ve got them. Neil, from your point of view, is it, how easy is it to treat customers fairly when you’re using investment trusts?

NEIL MUMFORD: Yeah, I mean again liquidity issues are not a problem because of types of trusts we’re buying. So, typically, they have a minimum market cap of £250-300m. We can buy those at an instance. We’ve never had a problem where we’ve not been able to buy or sell the required number of shares with an investment trust. I can understand for some of the smaller investment trusts out there that there can be issues, but again that’s, from a perspective, as you say, we have TCF and research, we prefer to avoid those areas of the market for those liquidity reasons.

PRESENTER: But I mean an open-ended fund are not typically priced once a day but I guess if you’re buying a bit of an investment trust in the morning, little bit in the afternoon, the price might have shifted.

NEIL MUMFORD: Yet, again, we know all…

PRESENTER: I mean is that breaking TCF or is that just pedantry in looking for an excuse not to use them?

NEIL MUMFORD: We’re not looking at a particular price that we’re buying at. We just, will that particular trust meet that client’s objective and fit nicely within the portfolio. OK, the benefits are that we know the price we’re buying at, which is key, and obviously we also know whether we’re going to be buying at a premium or a discount to net asset value. Obviously if you’re buying or selling, at a unit trust you don’t know what you’re going to get until the day after you’ve placed the order for the trade.

SIMON MOORE: The big problems would be I suppose if you got sort of 10 or more clients placing the orders at the same time or your dealers placing the orders of 10 clients and then you’re getting filled through the day or maybe over several weeks if it’s an illiquid investment trust, which price do you allocate to which client, I can see the problems must be quite difficult.

PRESENTER: But from what you’re saying that would be an issue really for larger institutions rather than advisers putting in £10-20-30,000 into a fund for a client?

SIMON MOORE: Well I guess most advisers would have more than one client and if your view on a trust changes during the day you’re going to want to reflect that across all the clients invested in it. And so you’ve got to place the orders for those clients at the same time. And if they’re getting filled over the weeks at different prices how do you allocate which client got which price? Because I could imagine that would be a problem.

NEIL MUMFORD: So, on a platform, we don’t have that issue because we’re buying it on a client-by-client basis. So yes you are quite right, Simon, if for instance we’ve got three clients that simultaneously we want to buy, they could be buying at different prices, but generally that will not happen because we’re not asset allocating for clients.

PRESENTER: OK, right, so if you’ve got the right product doing the right job that’s the best, you know, that should be enough to cover that point off.


PRESENTER: And you mentioned platforms there, I mean how generally available are investment trusts on platforms these days?

NEIL MUMFORD: The platforms that we use are really valuable to us, so one of the criteria that we have for choosing a platform is that it has ability to be able to buy investment trusts. There are a number that are still resistant to a certain degree on adding investment trusts, but in the main the majority of wrap providers now offer that facility.

SIMON MOORE: I think the figures I got from the AIC is that Fidelity or the funds network is going to have the full coverage pretty soon, and the co-funds, it’ll be by early next year; whereas Old Mutual haven’t got quite the technology right yet.

PRESENTER: So that’s always been quite a big issue I think hasn’t it, so that slowly sounds like it’s solving itself.

SIMON MOORE: There is obviously a technological gap that they’ve got to fix because investment trusts are traded on the stock exchange; whereas open-ended funds have a different sort of matching way of doing it. So you’ve actually got to have that gap to get the right price and things.

NEIL MUMFORD: That’s right. Some of the platforms have their own trading facilities. So, as an example, you’ve got a platform like Alliance Trust that owns its own market maker; whereas you have a lot of the others, such as Standard Life will actually buy into Winterfloods. And obviously, as Simon said, it’s clear that someone like Old Mutual are still coming to terms with that, and Fidelity are obviously bringing that on board. Because some you can buy instantly and some you have to put an order in. And, as Simon alluded to earlier on, they then get mopped up at the end of the day and bought on a bulk basis and then spread by the platform provider across the various clients that have bought that particular trust.

SIMON MOORE: But the good news is it’s getting better and better. I mean it’s, I think the trades through platforms as investment trusts has tripled since RDR. So it’s getting easier and easier.

PRESENTER: Well one thing on that with platforms is the issue of model portfolios. Are we starting to see model portfolios with investment trusts in them as yet, Simon?

SIMON MOORE: We have some. And I know other people do. But the problem is with any sort of models, if you’re clients, plural, are on different platforms, you’ve got to make sure that whatever investment you’re trying to put on this model is available on all platforms, and that’s a real minefield. It’s a very sort of admin heavy headache to try and make sure that as many as possible of your model constituents are on all the platforms that your clients are. So it’s not straightforward.

PRESENTER: And Neil, you were talking about the importance of bespoke portfolios for every client?

NEIL MUMFORD: Sure, yeah that’s right. Well going back to model portfolios there, I mean certainly with 7IM they’re in a minority of companies that are offering investment trusts within model portfolios. The main ones that we see are, if they’re provider led, are normally unit trusts, and if they’re IFA capability, typically an IFA they will create their own strategic asset allocation or just buy unit trusts. You know, we only deal with a small number of clients, so it’s far easier for us just to be able to build small bespoke portfolios for those clients. And I think, I certainly feel that if companies aren’t using investment trusts, they’re doing a disservice to clients by not considering them. And the other question you’ve got is one is TCF, but two are those companies really independent if they’re not, because clearly they’re not considering investment trusts, because they won’t use them in their own model portfolios.

PRESENTER: But obviously you’re a big fan of investment trusts, Neil, but are there downsides of using them. Because, you know, we hear a lot in the adviser community that if you use model portfolios it takes all this stress away, it takes all the strain away, it’s easy, it’s been checked by loads of experts everywhere. There’s lots of reasons why these are a great idea, but why are you ploughing your own furrow?

NEIL MUMFORD: I’ve always been a big fan. I started investing in investment trusts myself to really understand. And I’ve always believed that if you’re going to recommend something you need to really understand it and perhaps have your own experience of how these things work. You know I think there are a number of benefits to an investment trust rather than unit trust equivalents. You know, and one of them is the fact that an investment trust manager is working for the investor, whereas a unit trust manager is working for the fund manager, and perhaps more, in some cases, more looking to where they are sitting within their sector, OK, rather than what they’re doing for the actual investor themselves.

So I think that’s one of the big reasons why I like them. Two, as I said, because of the type of clients we’ve got we have as much as we can get certainty of a rise in dividend stream, where you can’t get that in a unit trust. A unit trust has to pay out the income that it receives. Whereas with the, in the sense of smoothing of income, the reserve accounts, an investment trust can keep increasing the dividend year-on-year, and that’s important for clients. You know, we have inflation at the end of the day, and although many unit trust managers will tell you that their income has gone up over time, when you look at the charts it has gone up over time, but it’s gone up and down and up and down; whereas you’ve had a more smoother return. And recently if you look at some of the bigger dividend heroes, you know over the last five years a lot of those have increased their dividends well above inflation, which is what investors need.

PRESENTER: Well, Simon, one issue with investment trusts is always the issue around costs, are they cheaper or more expensive in the round than in open-ended funds?


PRESENTER: We’ll come on to whether it’s worth it as a second thing?

SIMON MOORE: Before RDR happened the banner for pro investment trust was that they were always cheaper, because with, in RDR they had all these sort of commission to pay to the unit trust salesman, for want of a better word. It’s fair to say that there’s been a levelling of that particular playing field and really investment trusts on the whole the average sort of equity-only investment trust they’re on a par with their open-ended equivalent. But where they do differ is where they are illiquid underlying, which don’t exist in the open-ended universe. Broad brush, there are some big, much bigger ones. Scottish Mortgage famously just cut their charges so they’ve entered the FTSE 100 of investment trusts for a long time at less than 4.4% I think. Otherwise it does seem to be on a par with the open-ended funds.

PRESENTER: But you would say it’s a more esoteric investment trusts that have probably got the higher fees as a rule of thumb?

SIMON MOORE: There are still some which have a performance fee, which is quite rare in the open-ended world, and these esoteric ones will claim it’s harder go and find investment, if you’re doing private equity investing or infrastructure investing it’s harder than actually sort of buying on the stock market and putting it into portfolios. So I think they would justify their fees being slightly higher because of the extra shoe leather costs.

PRESENTER: And when you’re working out what the fees are and their comparison to open-ended vehicles, do you take into account the stamp duty that’s payable when you buy into investment trusts…?

SIMON MOORE: No I think the quoted figures are in the running of the close-ended fund. So for the OCF which you look at or ongoing charge fee for the unit trusts, there is an equivalent OCF figure for close-ended funds as well, and that’s all disclosed on the AIC website, and then the new KIDs that will be coming out as well. And that excludes the stamp duty which is an extra 50bps.

PRESENTER: OK. And Neil from your point of view do you think the investment trust industry, it can cut fees further or is it good value for money for when you’re selling?

NEIL MUMFORD: I think there’s always room to cut fees. But I think they’re value for money from what I’ve seen. As Simon said, you know, there are, the costs are halved, they’re sort of very very similar. And yeah I mean any cuts are welcome. You know, the investment trust industry, although more and more advisers are starting to use them, I don’t think they’re still used enough. And of course because obviously they’ve only got so many shares in issue, it’s not like a unit trust fund that can grow dramatically and then could look at the situation and cut their fees, although very few do. You know, there is a cost base at the end of the day that these companies have to meet.

SIMON MOORE: You mentioned earlier actually about the corporate governance effect as being part of the pain and the headache that the manager’s got to deal with on behalf of the client. But that’s going back to this problem about fees. That’s when you can actually exercise your right at the AGM to say no I’m voting against any sort of fees, please. You can write letters to the chairman to say that the fees should be lower than the open-ended equivalent, and by and large the independent directors are on the same side as the shareholders. So a lower fee is better for shareholders and that’s what the directors are for.

PRESENTER: Do you do much shareholder action on behalf of your clients, Neil?

NEIL MUMFORD: No, because they’re held in a sense as a nominee with a platform. We never get notifications for our clients to vote on their behalf. That’s done by the platform, or that’s the responsibility of the platform providers. I mean the one issue, the only issue that I sometimes have with investment trusts is that exactly with regards to corporate governance, yeah, how much sway a shareholder has, because in the main the larger trusts are managed by your Hendersons, your Invesco Perpetuals, and they’ve been managed by those companies for several years. In the main, most have done a very good job, but sometimes you’ll see the odd fund that you sort of think well some perform for very long time here, why has there not been a shift to move this from this manager to that manager. It seems to be a long sort of time of resistance before that actually happens, and I don’t know if Simon can elaborate on that.

SIMON MOORE: Well there are some famous examples where the directors are exercising their complete independence by moving the management to another group. Edinburgh Investment Trust is run by Invesco Perpetual. It used to be run by Edinburgh Fund Managers and then Fidelity and now Invesco Perpetual. So actually they’ve shown that they’ve moved it around. There aren’t many that have shown that sort of independence of spirit, but they occasional do it. Once a year or so there’s another beauty parade of investment trusts moving its management from one company to another, and again that’s part of making sure that there are only like 450 investment companies rather than 4,050 open-ended funds, because if they’re underperforming they either close them down because they’re acting as investors or move them to a manager who’s performing better.

PRESENTER: But when a question like that happens, I mean if you’re an adviser, I can see, I mean Simon somebody might say well somebody like Simon Moore would love that. He’s an investment trust analyst, he researches these, it creates work and excitement. But as an adviser you must be thinking oh god, there’s going to be bits of paper flying around, I’m going to be asked questions about resolutions and whether the thing’s a good idea or a bad idea. I just want them to give the money and…

SIMON MOORE: Well we have a corporate actions team so they flag that up and we just say this box needs to be a yes and that box needs to be no and somebody else does it for us, but I guess smaller firms might find it a bit more of a headache.

PRESENTER: And Neil, as a rule of thumb, if there were corporate action, does you, does it make you sit tight and see what’s left after the smokes cleared or is it a reason to get out, what do you…?

NEIL MUMFORD: No, I mean what we tend to do, and it’s exactly the same way whether it’s an investment trust or a unit trust, you know, if a manager is removed, the new manager’s put in, you know, first of all we’d need to look at the history of that particular manager that has been brought in and track record. And if we feel fairly confident that he can turn the fortunes around then we would give them time to do that. We wouldn’t just, you know, I know some companies will have firm actions that they would take which is right OK he’s left we’re going to move the money with him, or find someone else to move it to. You know we would sort of look at case by case, look at the fund manager, look at their track record and make a judgment call on that basis.

PRESENTER: OK thank you very much that. Sorry Simon?

SIMON MOORE: My take on sort of corporate actions as well is that when I’m interviewing fund managers, I expect them to take a real interest in the stocks they invest in and actually be actively, corporately, sort of like we’re seeing at the moment, several FTSE100 companies are having their reviews at the moment and the shareholders are voting against the fees for the three years. If we expect the guys we invest to be active on the corporate governance front then we should be as well. So I think it’s positive that we should do it.

PRESENTER: Now we’ve mentioned a few sources of information on investment trusts, but Neil if advisers are interested in finding out more and getting their head around what investment trusts do, what would you say are some of the good sources of information to target, and are these free or paid for?

NEIL MUMFORD: Well first of all you’ve got the Association of Investment Trust website, AIC website, which is very, very good: a lot of information on there with regards to going down to sectors. Most advisory firms will have some form of analytical software they use. You know, we use Financial Express and again you can go in there, you can research all of the investment companies. Citywire have got it, so there’s a lots of, you don’t necessarily have to pay for the software, as we do, you can go to the AIC website. You can go to places like Citywire. There’s two examples. And there are more out there to define a valuable, you can go to the websites of the companies. Each company has its own website where they’ll have fact sheets and information on, so there’s plenty of information for clients to gather.

PRESENTER: Well I suppose one thing with investment trusts is you get this annual report and accounts, which are very comprehensive, but by the time they’ve appeared there’s several months out of date. I mean would you rather have, how important to you is the information you’ve got completely up to date?

NEIL MUMFORD: We get fact sheets sent to us on a monthly basis by each of the companies that we’re investing into. So we’re on top there to say we’ve got the software we can use. You know, we’re not looking to dip in and out of these trusts; we are taking long term views anyway. So the information is out there and it’s not difficult to get hold of at the end of the day. So if you really wanted in depth information, you can get a copy of the annual or half year accounts, either directly from the company or again they publish them on their websites.

PRESENTER: But do you think given how comprehensive those are, you’d rather have something, it’s a privilege to have a document that comprehensive even if it’s a couple of months out of date rather than to have…?

NEIL MUMFORD: It’s always useful because you can understand exactly, you know, the reports and accounts are valuable, because one is you can get an understanding of why the performance has been what it’s been on the previous 12 months, what their views are going forward, if you can’t get in front of them, in front of the manager. And then marry that with the latest fact sheets they produce, it can give you a picture of whether that trust is still a suitable holding or should be considered as a new holding.

PRESENTER: Simon, from your point of view what are the…?

SIMON MOORE: Well I think also from the point of view of clients and perhaps sort of a retail client, getting access to analyst research is going to become more difficult after MiFID II from January next year. But I would say there are paid for research houses and Edison have probably got the best client list and you can read quite detailed client, work by their corporate clients. So the research Edison do are about investment companies. I think they cover about more than a hundred of them. Otherwise, if you want to do some charting, comparing open-ended and close-ended, which again is quite difficult for people who don’t have access to the complicated systems, the Financial Times website has got a charting tool which is very good. So you can plot the NAV against open-ended fund prices. And I think Alliance Trust website as well, which you mentioned before, that’s also got a very good charting tool. So, actually, you can get a bit more detail, than just reading report and accounts, from analysts and charts.

PRESENTER: You mentioned paid for research, but how much store can you put - I’m talking to you in general terms, I mean there’s a number of groups that do it - how much store can you put by this because they would say nice things wouldn’t they?

SIMON MOORE: Well then you could also say the broker, the company’s broker is going to say nice things about the company stock as well. So I think you can’t get away in terms of bias, but at least it gives you a bit more information lifting up the bonnet if you like and finding out how the trust works, than paying for, which might be quite a big fee for research from the stockbrokers, which nobody knows quite what the fee will be, but under MiFID II we’ve going to have actually pay a significant amount for independent research on all sorts of stocks.

PRESENTER: Neil, I mean as you look at your business model, without getting too much into details with MiFID coming in January 2018, does that have any concerns for you about keeping tabs on what investment trusts are up to?

NEIL MUMFORD: No, I say with the tools that we’ve got, we’re happy with the tools that we’ve got. So we subscribe to Financial Express which is very, very comprehensive. OK it’s not, in a sense it’s not giving an opinion on whether you should be buying those particular trusts. It’s for us to make that judgment call along with, you know, when we’re buying open-ended funds. So there’ll be some advisory firms that will hang their hats on people like Square Mile or Citywire for ratings on the funds. We prefer to look at them on a fund-by-fund basis and make our own judgment calls on those funds and how we can blend those in a client portfolio with other funds.

PRESENTER: Now we’ve got a couple of minutes, so just to press on and get a couple of things, final couple of questions of the way. One sort of reason for not using investment trust that’s banded around generally is compliance and regulation, it’s too big, you know, too much of an issue. From your point of view Neil is that a genuine problem or is that just a red herring?

NEIL MUMFORD: You took the words out of my mouth. I think it’s a red herring at the end of the day and sometimes it can be used as an excuse by firms as to why they don’t buy in investment trusts. You know, they will always, people always sometimes focus on the disadvantages. So they will focus on, or the fact that a company can gear, and that could be bad because falling markets, equity borrowing and pan borrowing and they’ve geared up and that can exacerbate losses. The fact that it can go to a discount. So firms will focus on more the negatives. And perhaps because they don’t understand fully about investment trust and also weigh that up with the positives, you know, my belief is that, and risk, you know some firms will say again we don’t, we want to keep it plain vanilla and just invest into unit trusts because we understand those and a client understands those. Yes, if we’re investing client portfolios in what we’re investing them too, it’s down to education and making sure that client understands what they’re investing in first. And providing they are happy and understands the risks, because there’s risk in anything you invest into at the end of the day, and a unit trust can be as risky, an equity unit trust can be as risky or riskier than an investment trust that might trade at a premium or a discount.

PRESENTER: But there’s one thing with investment trusts, it’s both an equity and it’s also a fund, are there any sort of tighter levels of regulation that surround you because you are advising clients individually, on one level into individual equities. Is there a different level of regulation?

NEIL MUMFORD: No, so our control function allows us to invest into investment trusts. It doesn’t allow us to invest into, and I know there’s a slight difference but individual shares in an individual company. So you are right that investment trusts is a share, just as Lloyds Bank is a share…

PRESENTER: But from a control function, it’s seen as a fund…

NEIL MUMFORD: From a control function we can invest into investment trusts but we can’t, under our permissions we can’t invest into, we don’t have discretionary powers to invest into individual shares, such as Lloyds Bank or Smith-Kline-Glaxo.

PRESENTER: Sorry Simon, you wanted to come back…?

SIMON MOORE: To go back and wave the flag for the Association for Investment companies, the AIC. Under the MiFID rules, which are going to be coming in from next year, all collective schemes would have been complex. And the AIC lobbied the FCA and European committees so that now as of the end of last year the opinion was from the FCA that investment companies are not automatically complex instruments from MiFID II. So that’s a great sort of hurrah for the power of the trade body doing the sort of lobbying for us so that actually clients don’t need to sign an extra sort of waiver for being asked for complicated instrument.

PRESENTER: And does that cover all the investment trusts or when we start to get out into the more esoteric things…?

SIMON MOORE: I think not hundred percent; it’s not a carte blanche. But I think we’ll have to wait until we see what the MiFID rules are from January what the actual ones which don’t comply. But the ones where everybody who invest in the mainstream would apply.

PRESENTER: OK, well I think we’re almost out of time so it was really just to get, thank you very much indeed gentlemen for joining us, but if I could get a final thought from each of you. So if there are advisers who are thinking about investments trusts but aren’t really sure, what would you say Neil?

NEIL MUMFORD: Give me a call! No, I mean look at them, look at them, understand them and invest into them yourself so you understand them.


SIMON MOORE: There are certain investment companies that don’t exist in the open-ended world, or perhaps shouldn’t exist in the open-ended world, like the ones investing in illiquid assets, particularly property funds. It’s very hard for an open-ended property fund daily dealt to invest in bricks and mortar buildings because you can’t sell part of a building when a client wants to redeem a unit. So have a look for those funds, those clients who have invested in open-ended property funds, have a look at the closed-end equivalent, you might see that there’s a lot of gems out there which clients have been missing.

PRESENTER: We have to leave it there. Simon Moore, Neil Mumford, thank you both very much indeed.
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