Discount volatility, gearing and performance fees are just three reasons why retail investors may be put off by investment trusts, and prefer their open-ended rivals instead.
However, certain trusts have simplified their structure, giving investors all the advantages associated with closed-ended funds such as cheaper fees and a longer investment horizon and manager records, without the complications.
Here are three you may wish to consider for your portfolio:
Ruffer Investment Company
FE Alpha Manager Steve Russell’s
£279m fund has one of the simplest structures of any investment trust. It does not gear, it charges no performance fee, and management actively strives to keep discount volatility to a minimum through either issuing or buying back shares, depending on whether it is on a discount or premium.
Unlike some other trusts it doesn’t have a specific discount target, but Russell told FE Trustnet
in a recent interview
that it is likely to act if the premium goes much above 3 per cent.
"We don’t have a limit on the downside, but when the discount went out to 12 per cent in 2007 we bought back shares to get the level down," Russell said.
As well as its simplicity, Ruffer Investment Company’s performance in recent years is also likely to be a selling point.
According to FE data, it has returned 99.4 per cent over five years – more than any other fund in its IT Global sector.
The trust has also been significantly less volatile than its peer group, thanks largely to its above-average exposure to bonds, commodities and other alternatives.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
Its priority of protecting against the downside means that it is slightly less dominant over three years, since it underperformed its sector average in 2009 and 2010.
In a recent interview with FE Trustnet
, Russell said he expected UK inflation to approach the "high single-digits
" in the next 10 years due to western governments’ quantitative easing programmes.
As a result, he is cautious on UK, US and European equities and positive on inflation-linked bonds, which have a 30 per cent weighting in the portfolio. He is also overweight Japanese equities, which make up 24 per cent of assets under management.
Ruffer Investment Company has an annual management charge (AMC) of 1 per cent and, as mentioned above, does not charge a performance fee. As of 10 July this year it was trading on a premium of 2.3 per cent and at that time had a three-month historic average of 3 per cent.
Troy Income & Growth
Like Ruffer Investment Company, FE Alpha Manager Francis Brooke’s
five crown-rated portfolio has a discount control mechanism (DCM) to help it reach an official target of 0 per cent, and does not charge a performance fee.
In a recent note to investors, its management stated: "Certain funds charge performance fees to their investors if performance is above a certain threshold."
"At Troy we do not charge performance fees. This is consistent with Troy’s desire to keep the cost of investing low and also reflects a concern that performance fees can distort the way funds are run, encouraging managers to take excessive risks."
Brooke says one of the first things management did when taking over the trust in August 2009 was install a DCM, in the same mould as Sebastian Lyon’s top-performing Personal Assets Trust. As of 10 July 2012, Troy Income & Growth was trading on a slight premium of 0.9 per cent.
Performance of fund vs sector and index since August 2009
Source: FE Analytics
The £89m portfolio has prospered under the management of Brooke, returning 75.16 per cent compared with 43.25 per cent from the All Share.
It has also been significantly less volatile than its benchmark and protected more effectively against the downside in last August’s slump. It has a yield of 3.6 per cent and a TER of 1.1 per cent.
It is not currently geared, though the manager has not ruled out moving in this direction in the future.
Aberdeen Asian Income IT
The £288m trust is one of the few with an emerging-market focus that does not charge a performance fee; instead it has a simple TER of 1.4 per cent. This is another portfolio that uses a DCM, this time aiming for a premium/discount between 5 and -5 per cent. According to data from the AIC, it is currently trading on a premium of 4.6 per cent.
The fund can use gearing, which is currently at 4.6 per cent of AUM. This level can go to a maximum of 25 per cent, but the manager is forbidden from taking out any fixed, long-term loans.
The five crown-rated trust has been one of the best performers of the last five years in its IT Asia Pacific ex Japan sector, delivering 147.49 per cent over this time.
It is also top quartile over three years, with returns of 92.9 per cent. Aberdeen Asian Income IT is currently yielding 3.6 per cent.