Saving with investment trust schemes

Investment trust savings schemes are usually managed by investment trust management companies, or by an investment trust scheme administrator appointed by the investment trust. "The schemes are 'wrappers' - they wrap around the shares of investment trust companies," explains Sherry-Ann Sweeting, marketing manager at The Scottish Investment Trust (SIT).

Investing in an investment trust savings scheme is relatively simple - application packs can be obtained by telephoning or writing to the investment trust manager or downloaded from the relevant websites. Once you have read the key features of the scheme, along with the terms and conditions, you enclose a cheque and/or direct debt detail and send this to the scheme manager/administrator who takes care of the rest.

According to the Association of Investment Companies (AIC), the majority of investment trust schemes hold your shares on a nominee basis. This means that the shares are held on your behalf by the registrar, which keeps the costs of ownership down, although it does restrict you in some other ways.

All investment trust schemes will send you a statement every six months detailing the number of shares you have and any charges levied.

These schemes also have a sale facility for those who wish to dispose of some or all of their shares. Sale arrangements vary between schemes and some require written notice - this will usually be made clear in the manager's brochure and terms and conditions.

Who uses them and why?

Investment trust schemes are recommended for people saving for the medium term. The average amount held is £10,000 and the average holder age range is 45-55, according to F&C data. They are commonly used to build up pension supplements and house deposits and to save for expenses such as university and school fees. They have also traditionally been used by parents and grandparents to save for children, although this is now a downward trend as stretched household incomes have forced savers to focus on their own finances, while the introduction of Junior Individual Savings Accounts (Jisas) last year has provided another option for those wishing to save for children.

HMRC statistics reveal that only 72,000 Junior Isas have been opened since they were introduced almost a year ago. This represents less than 1 per cent of the 6m children eligible for these accounts. But Dennis Hall, adviser at Yellowtail Financial Planning, says other savings vehicles can't compete with Isas, which are more tax-efficient - and, crucially, much easier to understand. "People opt for what they understand. And where Isas are very simple to get to grips with, investment trust schemes are a bit more complicated."

But, despite the tax-efficient competition, investment trust schemes still stand up as children's savings vehicles, whether you already have a Junior Isa and have reached your limit, or not. When used for children's savings they can be set up as bare trusts, which means the investments are taxed as the child's. James Saunders Watson, head of marketing for investment trusts at JPMorgan, says investment trust schemes are better at maximising returns over a long period because they provide access to gearing. Most Junior Isas offer open-ended funds that cannot borrow to invest, although you can get investment trusts via a self-select Junior Isa such as the one offered by Sippdeal (www.sippdeal.co.uk).

Mr Saunders Watson said a growing number of people are looking beyond savings schemes, to platforms, as a more easily accessible way to access investment trusts.

Pros

Investment trust savings schemes are most lauded for their flexibility and low charges. Those who have relatively small sums to invest can use such a scheme to build an investment over time - you can invest from as little as £20 per month or make a lump-sum investment from £250.

The advantage of making regular investments, or 'drip-feeding', is that it helps avoid the potential volatility of the stock market by smoothing out the share price peaks and troughs - a process known as 'pound cost averaging'. This gives a lower risk profile and also saves you having to guess when is the best time to invest.

Unlike Isas, investment trust savings schemes have no maximum investment limits. There is also no limit on the number of schemes you can hold. For investors with more substantial sums to invest, the attraction of savings schemes lies in the charges, which tend to be lower than their open-ended counterparts.

"Many manager-sponsored investment company savings schemes have no initial, annual or purchase charge because they are subsidised by the groups that manage them, something that would be hard to match elsewhere," says Annabel Brodie-Smith, director of communications at the Association of Investment Companies (AIC).

These schemes also allow you to reinvest dividends and use these to buy more shares in your investment company. Regular investors' dividend payments will be held and added to the next monthly contribution, while a lump sum investor's dividend payments will be held until they have a minimum sum suitable for investment.

A few investment trusts savings schemes, for example SIT's Stockplan, offer share exchange schemes whereby your shares are sold and the proceeds are used to buy shares in an investment trust savings scheme. "This is a cost-effective way to convert shares into investment trust shares, which also greatly reduces the administrative burden of so doing," says Ms Sweeting.

It is also possible to buy shares as a gift for other people within such a scheme (either a child or an adult), although you will have to consider the tax implications of doing so, for both yourself and the recipient.

Cons

A drawback of these schemes is that they tend to deal lump sums monthly or weekly, and so lack the immediacy of purchasing through a stockbroker. However, schemes have worked hard to improve this with some - Scottish Investment Trust and Witan Investment Services, for example - offering daily purchasing and real-time selling.

The majority of schemes also aggregate investment transactions on behalf of more than one client. "Such aggregation may sometimes achieve a better result, but may sometimes achieve a worse result for the investor than if the transactions had been carried out separately," says Ms Sweeting.

There can also be a downside to regular investing, as Michael Owen, director at Brooks Macdonald Financial Consulting, explains: "There may be times when a trust is standing at a premium to its net asset value (NAV) and saving continues at a time when a lump-sum investor would hold off.

"Furthermore, as a listed company, in order to sell shares there must be a willing buyer and the stock market sets the price at which purchases and sales are transacted. This could be significantly above or below NAV depending on supply and demand."

Choosing the right scheme

First look at the aims of the trust - does it meet your needs and risk profile? There are a range of investment trusts out there, some generalist and others specialist, and the benchmarks will be different.

Consider how long the manager has been running the trust and make sure the incumbent is the person with the track record. This information should be available from the managers themselves.

Choice and flexibility is also important - some savings schemes offer access to only a single trust (for example Witan) while others (F&C) allow investors to diversify across a range of trusts (subject to minimum investment being met for each trust), Then there are schemes such as Alliance Trust Savings that offer access to trusts from across the market. Its open architecture allows investors access to a full range of investment trusts, open-ended investment funds and UK-listed shares.

Ease of dealing is important in assessing how practical the scheme will be to use and whether it will meet your needs. Can you buy and sell online or by phone or do you have to send instructions by letter? And is the frequency of dealing - monthly, weekly or daily?

Also look at costs. "You should expect to pay very modest fees - probably less than 0.5 per cent plus stamp duty on purchases," says Mr Owen. He suggests investors study the report and accounts to understand what the fund aims to achieve, where and how it invests and what the costs are in order to be sure that the trust meets their aims and objectives before they commit their savings.

A selection of investment trust savings schemes compared

Source: Morningstar on behalf of AIC

Date: 30 September 2012