Funds & ETFs 

Investment trusts to boost your Isa

Costs are one of the few things that you can control in investing. , using cost-efficient funds in your individual savings account (Isa) is important as you do not want high charges to cancel out the Isa tax advantages. But passive funds are not the only way to do this. If you want active management, but with lower costs, investment trusts may appeal.

Investment trusts tend to have lower total expense ratios (TERs) than open-ended funds such as unit trusts or open-ended investment companies (Oeics). This means that after allowing for costs, they often out perform open-ended funds because returns are less impeded by fees.

Investment trusts have three other clear-cut advantages. They can borrow to invest, known as 'gearing up'. The gearing facility makes them higher risk than open-ended funds, but when markets are rising, gearing magnifies the investment gains and helps deliver better returns over long periods of investment.

Trusts can also pay dividends out of accumulated reserves, like a company. Each year, a trust is permitted to retain 15 per cent of its income in the form of a revenue reserve, helping it pay dividends to shareholders even if income from its underlying investments have fallen. This characteristic is what lies behind the decades-long records of dividend increases at some trusts.

It's easier to value investment trusts than open-ended funds, since their units trade on the stock market and they publish regular updates on the net asset value (NAV) of their investments. If the price is less than the NAV (a "discount") then there is value on offer (although of course, the discount may be there for a reason).

If you have built up a large capital base over time, then you might be more concerned with preserving your wealth rather than growing it further. While the wealth preservation theme has recently caught on among open-ended fund managers, who use the 'absolute return' remit to entice investors, many investment trusts have been run on wealth preservation remits for generations.

With all this in mind, we asked four advisers and analysts to suggest an investment trust for growth, income and wealth preservation. Click on the links for more details of performance and asset allocation.

Winterflood Investment Trusts

Growth: Edinburgh Dragon Trust (EFM)

For investors seeking exposure to the higher-growth markets of Asia ex-Japan, Edinburgh Dragon has a strong performance record placing it among the top two investment trusts in its sector over three and five years in terms of NAV return, when it is also well ahead of its benchmark, MSCI Asia Pacific ex Japan index.

You can buy the investment trust on a discount of nearly 8 per cent to net asset value (NAV), which is wider than its historic average and towards the upper end of its range. The investment trust is run by Aberdeen Asset Management, which has one of the most experienced Asian equity teams.

Income: Perpetual Income & Growth (PLI)

Winterflood believes Perpetual Income & Growth is well positioned to take advantage of the pockets of income still to be found among UK equities. The trust has the second highest level of dividend cover in its sector at 1.07 per cent, and reserves equivalent to 1.25 years of dividends. Winterflood also says the trust is in a stronger position to increase its dividends than many other UK equity income investment trusts, although its yield, less than 3 per cent, is lower than many of its equity income peers.

However, the trust is one of the stronger performers in terms of NAV returns, placing it among the top three trusts over three and five years and well ahead of its sector average and the FTSE All-Share index. It is important to remember when choosing an income trust not just to look at the yield but also the NAV and share price returns - as you do not want to lose capital.

The trust is defensively positioned by being underweight oil & gas and mining, which means it is likely to lag when these commodities are rising, though it makes strong long-term returns. The investment trust is on a discount of more than 2 per cent, in contrast to sometimes trading at a premium, so now might be a good time to buy.

The fund has a reasonable total expense ratio (TER) of just over 1 per cent, but levies a 10 per cent performance fee of any outperformance by the undiluted NAV of the FTSE Actuaries All-Share Index over each financial year.

Wealth preservation: RIT Capital Partners (RCP)

RIT Capital Partners has a reasonably defensive portfolio with the objective of delivering long-term capital, while preserving shareholders' capital, via a portfolio of various asset classes. The global growth trust makes good long-term total returns and limits downside in difficult years such as 2008. This is due to it being managed along the same lines as a family office, with an emphasis on preserving shareholders' capital while providing some participation in market rises. But its NAV can lag in such periods, for example 2009.

The trust invests in both listed and unlisted shares, as well as hedge funds and real assets mainly via funds. However, its investments in less liquid assets and other funds result in a relatively high TER for an investment trust of 1.88 per cent, and performance fees are charged where the increase in the value of the funds exceeds specified hurdles.


Growth: BlackRock New Energy Investment Trust

"Investing in alternative or clean energy stocks can provide exposure to what is undoubtedly a long-term structural growth sector," says Mr Haynes. "Against the tough global economic backdrop, companies operating in long-term growth industries will be highly sought after by equity investors."

In light of the recent nuclear accident in Japan, there may now be even greater interest in renewables, as low carbon alternatives to nuclear energy are sought.

Although it invests in a higher-risk sector, BlackRock New Energy is well diversified across a wide variety of international alternative energy companies in different sectors, though more than 40 per cent of its assets are in the US.

The trust trades at a discount of more than 17 per cent to NAV, offering the opportunity for gains.

In addition to its 1.08 per cent management fee the trust can levy a performance fee equal to 15 per cent of the increase in its net assets above a threshold of either a 10 per cent annual gain or the MSCI World Developed Markets Index return, whichever is higher. The performance fee is capped at 1.5 per cent of net assets.

Income: Temple Bar Investment Trust (TMPL)

Mr Haynes suggests Temple Bar because of the contrarian approach adopted by manager Alistair Mundy and the investment trust's low costs (its TER is only 0.57 per cent). It also sports an attractive yield of more than 4 per cent. That's not the highest in the sector, but its share price and NAV returns are among the best.

"With cash and bonds offering miserly returns, UK blue-chip shares are looking particularly attractive for investors seeking income and growth and prepared to take on some stock market risk in their Isa portfolio," says Mr Haynes. "Temple Bar is a well-established trust that manager Alistair Mundy at Investec has built up a strong track record for since taking over in 2002. This is an excellent low-cost UK core holding for investors wanting to follow the equity income philosophy."

Wealth preservation: Jupiter Second Split Trust (JSS)

Jupiter Second Split Trust is a split-capital investment trust which issues different types of shares. For wealth preservation Mr Haynes suggests the zero-dividend preference shares (ZDPs).

ZDPs do not pay dividends, but make a pre-determined (though not guaranteed) payment at the end of their fixed life. The final payout is subject to capital gains tax (CGT) at 18 per cent, or 28 per cent for higher-rate tax payers, making them more efficient than dividends, which are taxed at higher rates. Everyone has a CGT allowance of £10,100 a year so if you have not used this for other investments you could maybe pay no tax.

The fixed lifespan and payout mean ZDPs have in common with bonds than shares, but with inflation on the rise, make sure they have a sufficiently high payout. Jupiter Second Split Trust is aiming for a final payout which could equate to 6.1 per cent growth a year, ahead of inflation, providing its assets fall less than 11 per cent a year.

"This share has potential to provide a steady growth over the next three and a half years before winding up in October 2014," says Mr Haynes. "These are suitable for investors seeking capital growth in conjunction with moderate stock-market risk."

The investment trust is managed by Philip Gibbs, who is widely admired for his stewardship of the Jupiter Financial Opportunities Fund and his skills as a hedge fund manager. However, such pedigree does not come cheap; JSS shares trade at a slight premium to NAV of 1.53 per cent and can also levy a performance fee.


Growth: SVM Global (SVG)

The trust is a fund of funds providing access to a very wide spread of assets around six key themes including private equity (14 per cent of assets) and hedge funds (13.6 per cent). The trust's allocations to resources (24.2 per cent) and property 11.7 per cent) could be useful in an inflationary environment.

Despite its fund-of-funds structure and access to unusual assets, its TER is still only 0.86 per cent - well below that of equivalent open-ended funds. But as the trust charges a performance fee this could rise if it starts to perform better.

"This recommendation is adventurous to the extent that the underlying assets are potentially volatile as demonstrated by past experience," says Mr Shipway. "However, at current prices most of the downside has probably already been captured."

The investment trust trades at a discount of more than 17 per cent, but there is considerable embedded value within the portfolio and potential for significant share price appreciation in the years ahead, according to Mr Shipway. Although the investment trust's price suffered significantly during the financial crisis as investors retreated from risk, and its NAV returns have not been strong relative to its global growth peers over the past five years, the trust has a good longer-term record.

It is also run by highly experienced managers Colin McLean and Donald Robertson.

Income: Temple Bar

Like Mr Haynes (see above), Mr Shipway likes this investment trust's long history of providing a good yield. "It has had very consistent management over a long period of time and always comes up with the goods," he says.

Wealth Preservation: Personal Assets Trust (PNL)

Since its launch in 1983 this global growth trust has adhered to its objective of firstly protecting and then increasing shareholders' assets, seeking as high a total return as is compatible with taking a risk equivalent to that of the FTSE All-Share index.

Although Personal Asset's manager, Sebastian Lyon of Troy Asset Management, has only been running the trust for two years, Mr Shipway believes Troy has a track record and style that would suggest the same is likely going forward. Troy Asset Management has a very good record with some of its other funds, including Trojan Fund, also run by Mr Lyon since 2001. This is also a mixed asset fund and one of the best-performing balanced-managed funds. It has been very successful at limiting downside though it tends to lag rising markets.

"Although this is a recommendation leaning to the cautious, it must be accepted that with a reasonable weighting in equities, the portfolio will be subject to some equity market volatility," adds Mr Shipway.

In addition to equities, at the end of December the trust had 29 per cent in cash and cash-like instruments and 14 per cent in gold.

Personal Assets is trading at a premium to NAV of 2.21 per cent, though is unlikely ever to be purchasable at a large discount as its managers try to always keep the discount close to NAV.


Growth: BlackRock Frontiers Investment Trust (BRFI)

Frontier markets offer a good long-term growth story but their valuations are cheaper than emerging markets, making this an attractive area for long-term investors. Frontier markets are under developed equity markets which index providers such as FTSE, MSCI and Standard & Poor's do not feel are sufficiently developed to include in their emerging markets indices.

A cause for concern may be the fact that North Africa and the Middle East account for a large proportion of frontier markets; however Mr Peters argues that the actively managed BlackRock investment trust does not have exposure to Libya, Tunisia, Egypt or Bahrain, with its largest exposures - Nigeria, Qatar and Ukraine - accounting for around a third of its assets.

The investment trust was only launched in December 2010 so there is very little track record. However its management company, BlackRock, has a very good track record with its other emerging markets funds and an experienced team.

The investment trust is on a small discount of just over 1.5 per cent, which could widen as it is likely to be some time before there is substantial growth in these markets.

Its annual management fee is 1.10 per cent of its gross assets and it will levy a performance fee of 10 per cent of any NAV out performance of the MSCI Frontier Markets Index.

Income: Edinburgh Investment Trust (EDIN)

This trust offers a yield of nearly five per cent - currently the second highest among the 17 UK equity income investment trusts, while its TER is very low at 0.59 per cent. The trust has been run for the last three years by one of the UK's most respected fund managers, Neil Woodford, and Mr Peters likes his contrarian investment views. The dividend is secure as the trust has one of the highest levels of dividend cover among its peers.

The trust could be a good holding while inflation is high, as it targets growth in dividends per share by more than the rate of UK inflation, but its defensive portfolio allocation means it is likely to lag in rising markets.

Its shares are on a small (less than 1 per cent) premium to NAV, and bear in mind that the trust's managers are entitled to a performance fee in respect of each rolling three-year period in which the company outperforms its benchmark, the FTSE All-Share Index, plus a hurdle rate, being the equivalent of 1.25 per cent a year.

Wealth preservation: BH Macro (BHMG)

This listed hedge fund is a feeder into the Brevan Howard Master Fund, whose objective is to generate consistent long-term appreciation through active leveraged trading and investment on a global basis. BH Macro investment trust has proved its ability to protect in times of steep market falls with its NAV rising more than 23 per cent in 2008, and its share price falling 11.6 per cent, when the FTSE World fell more than 18 per cent.

Like many funds that protect downside, however, it tends to get left behind in rising markets, with NAV up only 0.97 per cent against more than 16 per cent for the FTSE World.

The investment trust can be bought at a discount to NAV of 7 per cent, far wider than its usual 2 per cent to 3 per cent. "If market, economic or political uncertainty occurs it should perform well," adds Mr Peters. "It is a good source of returns not correlated to equities."

But like most hedge fund it charges a performance fee. It also has a very expensive TER by investment trust standards - 1.87 per cent.


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