A general thread for all things investment trust. I'll start with a brief intro, mainly pulled from posts I made elsewhere, and some basic resources. Beyond that I will share news and interesting things I come across about various Investment Trusts. I invite you to do likewise, hopefully we can get some good discussion going about specific Trusts.**Not an Expert**
The "safest" way for lay people to invest may be in funds/ETFs. These are basically instruments that track an index, or others in certain types of investments. So for example you might invest in one which tracks the S&P500 (The biggest American companies, as an EU citizen you can't really invest in this but anyway) so as the market goes up or down so does your ETF. You can just buy it and leave it to do its business, you don't need to keep an eye on things the way you would if you invested in a particular company. However there is a major problem with this strategy, namely the Irish tax laws, specifically "deemed disposal". Basically, every 8 years you have to pay a tax of 41% on any growth/profits and the same rate on exit.
This tax rate is pretty crippling, and certainly damages compounding.
Investment Trusts are the next best thing (and better in some ways). Basically, Investment Trusts are closed end funds, sort of holding companies that are actively managed by a board etc. and listed on the UK market. There are lots of different types with different priorities and philosophies. The manager, depending on the rules of the Trust, can invest in a whole range of things, from shareholdings in particular stocks to bonds, commodities, cash, real estate etc. Most will either use or have the option of using "gearing" (borrowing/leverage). These ITs often have a base index they aim to "beat", which many ITs have a great record of doing. If your IT manager is good/lucky you can make very good gains above what you might in a comparable index, obviously the opposite applies too. Many pay good dividends. The downside is that the company charge a higher fee (usually) from the assets under control than happens with open ended funds/ETFs, but this would seem to me to be a small quibble, especially as IT's are treated, tax wise, the exact same as regular stocks. That is, you pay income tax as normal on dividends and the normal Capital Gains Tax when you sell. This is a massive advantage in two ways: CGT is 33% (less than for an ETF) and if you make a loss you can carry it forward and offset it against any future Capital Gain you may have. You cannot do this if you make a loss on an ETF.
I have checked the tax status of IT's in some detail. Revenue have never said that they should be treated the same as regular stocks. In practice they are. In theory, Revenue could change the rules and say they should be subject to deemed disposal, but this is very unlikely for two reasons: The first is that tax is being paid on an ongoing basis on any dividends. Secondly, is the way in which the IT's trade, they are subject to a premium or discount.
Premium and Discount
This is a very important factor to be aware of. IT's have a Net Asset Value (NAV) which is the real world value of their holdings. So lets say an IT owns only ten stocks, the entire value of which on the open market is £1,000,000. The value of the IT share that you buy on the stock market is not necessarily reflective of that value. Lets say it has ten shares, you would think that the value of the share would be £100,000. But not necessarily. The shares of the IT can trade at a premium or a discount to the NAV. So in our example the shares might trade at £90,000 or £110,000 giving it a discount/premium to NAV of -/+ 10%.
This means there is a great opportunity to essentially pick up shares for less than they are worth now and money can be made if the discount to NAV narrows, even if the underlying value of the shares the IT holds stay the same. You could also "overpay" by buying at a premium. You might think this sounds straightforward, and you should just buy whatever has the biggest discount and don't buy anything at a premium. No, not so fast, you need to investigate. There are often very good reasons for there to be a discount or premium. The NAV is not static, and can go down as well as up.
That said, sometimes discounts are caused by market panic over short term issues, so you can pick bargains up here.
There is also great opportunity (which appeals to me) to pick up particularly good bargains by buying Value orientated IT's at a discount to NAV. In theory, if I buy one of these at a discount, I am buying a company that has made investments that it felt were at a "discount" to their real worth, so I am getting a "double discount" which could give me great returns.
Some ITs try to make sure there is no or a very small premium or discount to NAV. They do this by issuing more shares when there is a premium, and buying shares back when there is a discount.
Closed vs Open Ended
This is a key distinction that is important to understand. Basically, with an open ended fund (Investment Trusts are not open ended) you pay your money into a fund and it is invested. If you sell, the fund manager will have to sell also to give you your money (simply put). This is why you can usually only buy into funds at a fixed end of day price, whereas closed end funds are traded like normal stocks. With a closed end Investment Trust, you are not "giving" your money to be invested, rather you are buying a share in a "holding company" of sorts which makes investments. The company raised money to invest by issuing shares, this is the "pot" which is used. The share price of the IT going up or down has zero impact on this pot.
There are some advantages to this arrangement, one of them is that IT shares can easily be traded like any other stock, but another is that if there is a run and everyone panic sells their shares in the Trust, in theory the manager can sit there and do nothing, he does not have to go and sell stuff like he would with an open ended fund. So for example, he may have made some investments in undervalued assets which have not "come good" yet. If the shares of the Trust go down, he does not have to sell anything. In such an instance if the NAV has not been decimated, the share price would just go to a massive discount and recover when people stop panicking. In an open ended fund loads of stuff would have to be sold, which can kill the fund entirely. This was one of the reasons why Neil Woodfords fund collapsed, basically everyone wanted their money back, and he had a load of illiquid assets that could not be quickly sold, or sold at anything close to their normal price because they were desperate. He has claimed that if given more time prices would have recovered and the fund not gone bust. If it had been an investment trust, he would have been able to find out as he would not have had to try and sell everything (that said there are more reasons why it failed, he messed up big time, I'm just making a point).
Investment Managers
Investment Trusts are run by a board who are answerable to shareholders, like in any other company. They appoint an investment manager to run the trust, usually from an asset management company. They can sack and replace the manager if they wish, usually if the shareholders demand it after a period of underperformance by the trust. So, in theory, if a manager makes a bags of running a trust he can be sacked and someone else can give it a go. Remember, the trust still has the "pot" to work with (unless the previous manager literally lost everything). So what can happen is that a manager can be getting poor returns, be sacked, someone new come in, sell the previous managers investments and replace them with their own, and really reinvigorate things. The point to take here is that if a Trusts has underperformed and perhaps left you in the hole a little, a change in manager may certainly improve things.
Recently it was announced that the investment manager of Scottish Mortgage, James Anderson, is retiring next year. With ITs it is vital to keep an eye on the manager, and who managed it in the past. IT managers can have their own style (and luck!) that can massively affect the performance of the trust. When you are looking at past performance of an IT, you have to account for the manager - if a new one was appointed last year, the IT performance 3 years ago is of limited use. But if the manager has been in charge, and successful, for a long time then past performance is useful. Of course, past performance does not guarantee anything, but if a manager consistently beats his index it does mean something.
That said, a change in manager might not result in a significant change in philosophy and performance, particularly if an assistant from the same firm is taking over. This is the case with SMT, Baille Gifford remain in charge, and an experienced deputy is taking over. The same is happening with Monks. This is the ideal form of transfer, if the manager has been successful. A change in manager can also be a massive shot in the arm for an under-performing trust, case in point is Temple Bar.
Trust investment managers differ wildly: James Anderson is a dedicated (and wildly successful) Growth style investor. Peter Spiller, manager of CGT for coming up on 40 years is a far more conservative, Value style investor (also extremely successful). Some managers are also "active" managers. Take Christopher Mills of North Atlantic Smaller Companies, he specializes in getting positions in companies, then actually going in and forcing changes, forcing out and replacing company managers etc. He has been fantastically successful for decades and has a "value" style philosophy. It is important to know who the manager is, and what their style is. If you picked a Trust because it has a Value style, and the manager is replaced by a Growth manager, you might look at closing your position as maybe you specifically had this Trust in your portfolio because of the style.
Investment Trust Resources
All ITs are listed here, and you can filter to find the type you want:
https://www.theaic.co.uk/aic/find-compare-investment-companies?sortid=Name&desc=false
When you find one you are interested in, on the AIC website it gives you direct access to Monthly Factsheets, as well as Annual Reports. This is the best "one stop shop" for IT info. But obviously Google around and read all you can.
There is also a dedicated Investment Trust Podcast, giving a weekly roundup on IT news and action:
https://www.theaic.co.uk/insights/podcastsBooks:
There are a couple.
The Investment Trusts 2021 Handbook appears to be currently free on Kindle. I bought this and found it very interesting. However, its not exactly a critical guide, more an advertisement for the industry, but as a free introduction you can't really argue.
The Financial Times have a guide, an older version of which I have read:
https://www.amazon.co.uk/Financial-Times-Guide-Investment-Trusts/dp/1292001569/ref=sr_1_5?dchild=1&keywords=Investment+Trust&qid=1620240659&sr=8-5 This was ok, but nothing more.
The best book (it would want to be for £40) seems to be this one, Investment Trusts a Complete Guide, just published in February by a noted long time observer/expert:
https://www.amazon.co.uk/Investment-Trusts-Complete-Andrew-McHattie/dp/1527281752/ref=sr_1_3?dchild=1&keywords=Investment+Trust&qid=1620240074&sr=8-3 I have not read this yet myself, but will probably pick it up soon.
tl;dr
If you do not think you can consistently buy and sell great stocks in companies that will give you (hopefully) great returns, and would rather have an 'expert' do this for you, IT's are great. You can buy a selection of them and get exposure to loads of great investments. They are better than funds/etfs in Ireland mainly because you will pay less tax.
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