On trust
JOHN BULL
The fight for your savings is going on right under your nose. It is a fierce, high- spending4 ccn1test. One unit trust group. Save and Prosper, pays out well over £1 million a year on advertising. The insurance companies, the clearing banks, the building societies, the national savings movement are answering back with costly promotions. If you "iliant to see the results, look round any railway station: a large and rising proportion of the advertisements there are financial in character. But in this ding-dong battle, one interested party is--or until very recently has been—curiously silent. I refer to the investment trusts, which manage many hundreds of millions of pounds of savings. Of course they cannot compete head-on with their nearest rivals, the unit trusts, because massive advertising would not be appropriate to the different product they offer. Yet if the saving public passes it by. the movement will eventually become moribund. That is why the Association of Investment Trusts has at last begun to to speak up for itself. And now one of the most highly respected firms of stockbrokers. Phillips and Drew, has come forward with an interesting comparison.
Durinethe six and a half year period from the beginning of 1963 to 31 July 1969, the Financial Times all shares index appre- ciated by 39 per cent. Over the same span the Unitholder Index of 180 leading unit trusts rose by 42 per cent. But the Financial Times investment trust index increased by 56 per cent. On this evidence the investment trust movement is worth considering. though it would be quite wrong to con- clude that superior investment expertise was alone responsible for the differential be- tween the two. Probably the most im- portant factor was the 'gearing' provided by investment trusts. What is gearing in this context?
The simplest example is that of a man who buys a house for £5.000, financing it with £1,000 of his own money and a £4,000 mortgage from a building society. If, let us say, he is eventually able to sell the house for £6,000—a 20 per cent appreciation in the value of the house—and then pays off the building society (£4,000) he is left with £2,000, which is equivalent to a 100 per cent capital gain on his own funds invested in the house. The 20 per cent gain has been magnified into one of 100 per cent. Many investment trusts work on the same principle. As well as shareholders' funds they also invest money borrowed on a fixed-interest basis and so gains (and also, it is important to note, losses) are magni- fied—or geared up—in the same way.
Investment trusts can provide themselves with gearing, unit trusts cannot. But Phillips and Drew advance another argument in favour of investment trusts which seems to me to be less compelling. They say that because the share prices of investment trusts
are quoted on the stock exchange, and are therefore subject to the forces of supply and demand, the trusts often sell at a dis- count to their asset value—and 'offer a cheap method into a large industrial and geographical spread of investments'. It is the last bit I quarrel with. On the face of it if you can buy assets at a discount you are buying them on the cheap: the trouble is that these discounts endure, so that when you come to sell shares in an investment trust, the buyer takes on your investment on the cheap.
Phillips and Drew have also done some interesting analysis of individual invest- ment trust performance. For this exercise they have taken the period March 1964 to March 1969. Seven investment trusts,scored gains of over 20 per cent per annum. They were Second British Assets ( +22.7 per cent), Witan (+22.2 per cent), London Elec- tric and General, British Assets, Capital and National, General Stockholders. and Continental and Industrial. Out of this list Witan has long been a favourite of mine. I dropped it recently from my portfolio because I thought the share price was due for some downwards revision following the sharp fall in Wall Street. But now this ad- justment is out of the way, Witan is a `buy' again. Phillips and Drew's analysis also provides a guide to merchant bank performance in the investment-management field. Out of the twenty-five leading management groups running investment trusts, Guinness Mahon comes third, Schro- der Wagg is seventh, Hill, Samuel thirteenth, Lazards sixteenth and Kleinwort Benson nineteenth.
Should investors buy investment trusts? The answer is definitely yes if you are in for the long haul. Then investment trust gearing should work for your benefit. And certainly the quality of management is as good as that found elsewhere. But 'if you are taking a two- to three-year view rather than five, I am not so sure.
ffolkes's industrial alphabet
0 is for 0 and AI
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