How to buy investment trusts

Jason Hollands, managing director, business development and communications, at TilneyBestinvest, says: “It is probably hard to appreciate today, but at the time that F&C launched its regular savings plan, it was seen as ground-breaking, even controversial to be ‘marketing’ shares to the public. Lump sum investing now has firmly shifted to platforms.”

Indeed, around 70 per cent of all share buying is now conducted via platforms and it is easy to see why: there is superior choice, you can get trusts from multiple providers and you also get a range of attractive functionality, such as daily valuations and portfolio analysis.

Even so, share schemes are still offered by the majority of investment trust providers and still account for a sizeable chunk of inflows. Aberdeen Asset Management , for example, reports that its in-house savings plans account for around 25 per cent by annual value of turnover. This represents £1bn of investor assets by value.

Equally, they have been a successful investment for many people. The Association of Investment Companies (AIC) reports that a £1,000 investment in F&C Global Smaller Companies (FCS) – an IC Top 100 Fund – over the past 30 years (since the F&C scheme started) has grown to £32,877, while a £1,000 investment in Foreign & Colonial Investment Trust (FRCL) has grown to £22,716. A £1,000 investment in the average investment company over 30 years has grown to £21,485.

There are also clear cost advantages for certain types of savers. James Budden, marketing director at Baillie Gifford, says: “In some cases share schemes can be very cost effective. In our savings scheme, the only thing an investor pays on purchase is stamp duty: We do not charge dealing costs, which makes them a good option for regular savings and dividend reinvestment. Some platforms can charge you every time, every month, and that can be very expensive, particularly for smaller savers.”

This is because investment trusts are shares and are therefore subject to a different charging structure to open-ended collective funds. For example, a consumer platform might charge a dealing fee of £8-£10 for each transaction. That works well for someone investing a lump sum, or with high regular savings, but less well for someone trying to save £100 per month, who would quickly find their fund eaten up in charges. This model is standard across many platforms. Those reinvesting their dividends can also run into problems, potentially being charged a dealing fee each time a dividend is used to purchase more shares.

These costs can exert a drag over time. For example, an investor paying £8 on a £100 monthly investment would end up with around £5,800 after five years. The same investor would receive £7,100 without the charges. Platforms are not always designed for investment trusts and unwary investors can rack up charges.

Simon White, head of investment trusts at BlackRock, says: “For long-term investors who are not interested in portfolio trading, share schemes do offer an attractive way to build up a regular savings pot.” He points out that there is an inherent advantage in regular savings – investors benefit from pound cost averaging, which can help them smooth out market volatility.

Mr Hollands says that investors have to look carefully at the charging structure as share schemes are not universally cheaper. He says: “Platforms can be more competitive on costs for smaller investors. That’s because the well-known investment trust players, Alliance Trust and F&C, both have fixed custody fees which are great for larger balances but crushing for smaller ones. In the case of Alliance it is £18.75 per quarter (£75 per year) and at F&C it is £40 per year*, against, say, our ad valorem fee of 0.4 per cent. F&C only looks competitive once you’ve got to over £10,000 and Alliance to around £19,000.

“However, there can be a case for these schemes for regular savers who want to invest in a specific trust, where they mitigate the costs of regular dealing fees and depending on the account fees involved. F&C has no dealing fees on direct debit monthly savings schemes. Essentially, investors need to weigh up the negative impact of fixed custody costs on small accounts versus the potential dealing costs.”

The share schemes tend to come with very low minimum investment levels. Platforms have dropped their minimum investment levels recently, but the schemes are still very competitive: The Baillie Gifford scheme starts at £30 per month, or £250 for a lump sum; Henderson’s scheme starts at £20 per month, with no minimum lump sum. This makes them a natural choice for children’s savings and groups such as Witan have launched schemes specifically for children (Jump). A number of share schemes have gift facilities as well, so the fund can be set up in someone else’s name; perfect for the generous grandparent.

There is also the problem that some of the major fund supermarkets do not offer investment trusts or only a very limited range. Fidelity FundsNetwork, for example, only offers Fidelity’s trusts, while Cofunds does not offer them at all. Although Cofunds is theoretically only an adviser-facing platform, it is used on a white-labelled basis by online fund brokers such as Chelsea Financial Services. These platforms have been losing market share in recent years, but may be a beneficiary of consolidation in the platform industry, which – as it stands – would reduce the availability of trusts on platforms.

Mr Budden also points out that share schemes are good for promoting shareholder enfranchisement. Investors also get direct access to the investment trust manager through share schemes. He believes this is very important for some investors: “There are lots of people who like to receive the report and accounts, get statements and participate in the annual general meeting (AGM). There is no such personal service from being the client of a platform.” In fact, many platforms charge clients for going to the AGM, or for sending the report and accounts.

James Saunders-Watson, head of investment trust sales at JP Morgan, agrees that this keeps communication between the asset manager and the end investor alive: “For us, the savings scheme is a very important way to communicate with our direct investors, to find out what they want.”

He says that investors in the share scheme will tend to favour more packaged investment options such as its Elect, Claverhouse and Mercantile trusts, but the group also gets strong flows into its China and Indian funds. He is clear that the share scheme is important for the group, representing 13.5 per cent of its investment trust assets, even though flows have been largely static over the past few years: “Investment trusts can be difficult to buy and share schemes can be an efficient way to get access.”

The AIC is clear that the schemes still have relevance. It says they offer good flexibility, with the ability to stop and start contributions at any time, plus low minimum investments, and in some cases, if requested, real-time dealing. Mr Budden says he thought the popularity of the schemes would fade, but Baillie Gifford’s scheme is having its best ever year. It has taken over £50m in the year to date to the end of the third quarter. He adds: “It is the biggest single nominee holder across all our trusts and is therefore pretty important.”

The schemes naturally suffer in comparison to open-architecture platforms. They are, by their nature, confined to one provider. This is more of a problem for some groups than others. For example, JPMorgan Asset Management, Aberdeen and Baillie Gifford offer a reasonably comprehensive range of trusts and investors could build a balanced portfolio through combining their trusts with relative ease. It might be more difficult with groups that only offer a handful of trusts. Investors would need to be sure of their investment selection before they committed to one provider.

Melissa Gallagher, director, head of investment trusts at Allianz Global Investors , adds: “We believe investors have benefited by being able to invest in investment trusts, whether via a lump sum or a regular saving plan, through an increasing number of online platforms. The wider choice has enabled investors to select from a broader range of trusts and to seek out the most competitive charging structures on offer.”

Investment trust schemes are among the easiest and most cost effective ways to access investment trusts and after years of waning popularity relative to platforms, they are seeing increased interest. The Retail Distribution Review and other initiatives have focused shareholder attention more forensically on cost and there is no doubt that, for some investors, share schemes represent the cheapest way to buy.

However, as always, investors need to do their homework on charges.

INVESTMENT TRUST SAVINGS SCHEMES CONTACT DETAILS

Below is a table showing contact details and minimum investment amounts for all the investment trust savings schemes. The Association of Investment Companies has a comprehensive table with further details on its website: www.theaic.co.uk.

Source: AIC website, www.theaic.co.uk

WIN £5,000 TO INVEST IN AN INVESTMENT COMPANY

Investment trusts: Striking the right balance at Foreign & Colonial

Investment trusts: Best global investment trusts

Investment trusts: The professional picks 2014

Investment trusts: IC reader favourites

Investment trusts: Around the world in eight invetsment trusts