David Leslie, MD of Belmont Asset Management in Cape Town, gives the lowdown on investment trusts.

I am often asked to explain the allure of investment trusts (ITs).  At Belmont, we view the advantages of investing in ITs as significant and have enjoyed much success over the years through including them in clients’ offshore portfolios.

ITs are collective investments, much like unit trusts, and are typically London listed.  They invest in global markets and can also be region specific.

Advantages to investing in ITs

There are several distinct advantages to investing in ITs.  Firstly, they often trade at a discount to net asset value (NAV) which means that you can buy a quality portfolio of shares or securities at a discount (eg, £100 of shares at a 10% discount, equating to a £90 cost). A recent example (October 2013) is British Empire IT which has an excellent underlying portfolio and is trading at a significant discount to its NAV.

Furthermore, ITs often have high quality investment teams, for example, Aberdeen, RIT Capital and British Empire.  Unsurprisingly, we recommend buying a high quality team investing in high quality securities!

What are the specific differences between ITs and unit trusts?

In essence, investment trusts and unit trusts do exactly the same thing. They are both collective investment schemes which have varied mandates, and their underlying portfolios reflect those mandates.

Investment trusts, however, are listed vehicles and therefore they are closed ended, whereas unit trusts are unlisted and are open ended. Investment trusts therefore enjoy a major advantage during times of market stress because underlying securities do not have to be sold. The shares are merely sold and bought in the market. Of course discounts tend to widen at such times, but the company’s assets remain intact.  Unit trusts on the other hand have to sell securities to fund redemptions. In times of market stress this will often be the highest-quality, most liquid stocks, which then degrades the quality of the portfolio.

It is also worth noting that cost structures for ITs are generally lower than unit trusts.

Whichever vehicle you are looking at, always remember that it’s the quality of the investment team that is paramount.