Opinion: Why investment trusts should not be on best buy lists
1 August 2019
Peter Sleep, senior investment manager at 7IM, disagrees with suggestions that closed-ended funds belong on best buy lists and offers three reasons why.
Following the suspension of a well-known open-ended investment company due to holding illiquid assets, there have been fresh calls for closed-ended investment trusts to be included on fund best buy lists, as if the trust runs into trouble, it’s far easier for shareholders to cash out by selling their shares on the market. However:
1. As recent events have shown, DIY or execution-only platforms and their best buy lists can exert a massive influence on investors, resulting in huge swathes of money being directed into certain funds. However, because investment trust are closed-ended they have limited capacity to absorb the sort of money that best-buy lists can direct into funds.
2. The sheer weight of money from execution-only platforms can distort stock prices, which can lead to a painful experience for inexperienced investors. For example, the Lindsell Train Investment Trust stock price was recently trading at a 93% premium to the value of its underlying investments. Then the stock price suddenly dropped by more than 30% virtually overnight, after an open-ended sister fund was removed from a well-known best buy list. Ironically, the Lindsell Train Investment Trust was not on the buy list, but investors apparently bought this instead. The investment trust remains at a 32% premium.
3. As well as understanding how investment trusts can hold unlisted and illiquid assets, and how flows can impact the premium and discount of investment trusts, investors also need to grapple with how investment trusts can employ gearing (borrowing money to invest). While gearing can help an investment trust outperform, it can also act as a double edged sword as it can also magnify losses when markets fall. This can be a complex subject for some novice investors that use best-buy lists to get their head around.
While investment trusts have many advantages over their open-ended counterparts and they are undoubtedly an excellent investment vehicle, with many able to demonstrate a long and strong track record, this doesn’t mean they are suitable for a lot of buy lists. In fact, due to them being more complex and harder to understand, I would say that this is an area where many investors would really benefit from expert advice from a financial planner to avoid mis-steps.
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