Gluey Notes

Enterprise investment schemes (EISs) will not come under the Financial Conduct Authority’s (FCA) impending ban on the retail sale of unregulated collective investment schemes (Ucis), New Model Adviser® understands.

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John Wilson, managing director of Wilsons Solicitors, praised the new Financial Conduct Authority for warning that one million borrowers out of the 2.6 million with interest- only loans have inadequate finance to repay the capital borrowed and risk losing their homes. But he said the FCA warning does not go far enough and more should be done to tackle the issue, which it called a ‘ticking time bomb’. The FCA calculated that the average shortfall on an interest only loan could be £72,000.

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How many crowdfunding platforms is evidence of a crowdfunding bubble? Well, when an organisation feels the need to launch a directory to list and detail all of the crowdfunding options in a single market it’s perhaps a sign that exuberance for crowdsourced financing is running a little high. Nesta, a U.K. charity focused on promoting national innovation, has launched just such a directory, detailing the U.K.’s crowdfunding landscape — and all, by its count, 31 current crowdfunding platforms up and running and begging for money on your behalf.

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The retail banking sector in an independent Scotland would be dominated by only two large banks – the Royal Bank of Scotland and the Bank of Scotland – with the costs for compensating the depositors falling on one bank if the other was to fail, the study will say. However, an independent Scotland would be required to set up its own deposit guarantee scheme rather than share existing UK schemes, the Treasury says.

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Industry experts explain what newcomers to the sector need to know before parting way with their hard-earned cash.

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Investment trusts remain an unloved area of the market for the vast majority of retail investors. Closed-ended vehicles have tended to outperform their open-ended rivals over the short, medium and long term; nevertheless, issues such gearing and discount volatility mean that they are often looked upon with suspicion by investors and IFAs, who see them as too complicated. However, Winterflood’s Simon Elliott (pictured) says that there are a just a handful of key factors that need to be understood for those willing to take the plunge. He pinpoints discount volatility as the most important thing for newcomers to consider. “The point with investment trusts is that they are more of a sophisticated product than open-ended funds,” Elliott explained. “At the end of the day you are buying a share of a company that is listed on the stock exchange. There is both the NAV [net asset value] performance and the share price performance, which can work in your favour as you get a ‘double-whammy’ effect if both perform well.” “Of course, there is also the reverse of that. A trust may have perfectly satisfactory NAV performance but the share price performance may drop if the discount widens.” Elliott says many investment trusts alleviate this issue by using discount control mechanisms (DCMs), which limits the degree of discount volatility. “The Personal Assets trust – which has a large retail following – has a zero discount policy, for example,” he said. “This means that when it is trading on a premium it issues more shares to the market and when it is trading on a discount it simply buys back shares.” Elliott says one factor that many investors overlook is that many trusts have a trading range. This, he says, distorts valuations in the sector, as an investment trust could be said to be expensive even if it is trading on a discount. “For example, Evy Hambro’s Blackrock World Mining has a trading range of between 15 to 10 per cent discount,” he said. “This means that if the discount narrows to 10 per cent investors will usually sell shares and if it widens to 15 per cent they will buy again.” “It is currently on a 7 per cent discount, so we would say it has broken out of its discount trading range,” he added. As Elliott pointed out earlier, investors who buy an investment trust on a discount could be doubly rewarded if the discount comes in, or even goes on to a premium. Similarly, investors could get burnt if a trust on a premium falls from grace, and ends up on a discount. Peter Walls, manager of the five crown rated Unicorn Mastertrust, says he finds it uncomfortable to buy a trust that isn’t on a discount as he has a contrarian approach to investing and doesn’t want to follow the crowd. However, he says investors shouldn’t necessarily sell shares if they are on a premium. “I think that discount movements do cause me to be a contrarian investor. However, if you look down the list of my largest holdings you can see that some of them are now trading on a premium,” he said. “Most notably are the Japanese trusts – Baillie Gifford Japan and Baillie Gifford Shin Nippon. The so-called “Abenomics” has really inspired a dramatic change in Japanese equities and the trusts are up very strongly so far this year.” “Their premiums have built up and the contrarian within me says that now I should be selling them.” “However, I met with John MacDougall recently and it was good to see the quality within his portfolios. I won’t be selling just yet as I have taken comfort in the underlying portfolio.” The Baillie Gifford Shin Nippon and Baillie Gifford Japan investment trusts are trading on a premium of 5 per cent and 1 per cent, respectively. Both trusts have returned over 50 per cent since the start of the year. Performance of trusts year to date Source: FE Analytics Stephen Peters, investment manager at Charles Stanley, thinks that discount volatility is well worth considering before buying a trust; however, he says it shouldn’t be investors’ number one priority. “My first thought is that you should always look at an investment trust’s discount or premium last, and instead focus on the quality of the trust and manager,” he said. “At the moment, any investment trust with a meaningful yield is trading on a premium or a very narrow discount to NAV. The question that arises is, is it ok to buy on a premium, or should you look to buy an open-ended version?” “The key factor when buying an investment trust on a premium is foreseeing what will make it trade on a discount. Currently, the main factor would be if there were to be a meaningful rise in bond yields – I am not a macro person, but that isn’t going to happen anytime soon,” he added. Peters points out that NAV performance is usually the biggest driver of returns – another reason why investors shouldn’t get too hung up on discount volatility. “If you are in the right asset class, that should deliver returns no matter what it is trading on,” he said. “A prime example of this is the Aberdeen Asian Smaller Companies investment trust. It used to be trading on a discount of around 15 per cent five years ago.” “Yes that has narrowed a lot since then which is nice, but the NAV performance would have made your capital increase the most. Over time, you have seen far higher returns from the NAV than from discount movements,” he said. According to FE Analytics, the share price of the five crown rated Aberdeen Asian Smaller Companies trust has delivered more than the NAV over a five year period, but as Peters points out, the closing of the discount hasn’t been the principal driver of performance. Performance of trust’s NAV versus share price over 5yrsSource: FE Analytics The two other key points industry professionals highlight are gearing and charges. The ability to gear, or borrow money, allows an investment trust manager to make higher conviction calls during rising markets, and is one of the major factors why trusts tend to outperform their open-ended rivals. Oriel Securities’ Tom Tuite Dalton sees gearing as a potential advantage, but says that investors should look to managers with a proven track record in this area. “The amount of gearing really depends on the quality of the manager,” he said. “If you look at Jupiter European Opportunities, which is run by Alexander Darwall, it is highly leveraged. However he would say that the companies he invests in are less leveraged.” “That said, if you are a new investor and don’t want to take too many risks maybe you wouldn’t want to buy a highly-geared trust.” Some cautiously-managed trusts, such as the Personal Assets IT, choose not to gear, as highly leveraged portfolios fall harder during market sell-offs. The final factor for investors to consider is their charging structure. While investment trusts tend to have lower annual charges than open-ended funds, broker fees – which tend to be upwards of £10 per transaction – and performance fees means that their cost advantage is often minimal. The impact that performance fees have had on the cost of owning the Scottish Oriental Smaller Companies IT is very telling, for example. While it has ongoing charges of 1.01 per cent, in the past year the performance fee has pushed the annual charge to 1.96 per cent. Liquidity is often seen as a potential stumbling block for investors, but the experts FE Trustnet spoke to said that for retail investors with relatively small lump sums – i.e. less than £100,000 – this shouldn’t be too much of an issue.

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