Investment trust workshop. Nick Britton Head of Training AIC

Transcription

1 Investment trust workshop Nick Britton Head of Training AIC Spring 2018

2 150 years young 1868: Launch of Foreign & Colonial Government Trust Philip Rose Objective: To provide the investor of moderate means the same advantage as the large capitalist in diminishing risk in Foreign & Colonial stocks by spreading the investment over a number of stocks 2

3 Growing popularity 1, Purchases on advised platforms ( m) RDR Source: Matrix Financial Clarity 3

4 Perceived benefits % of total respondents who saw each feature as a benefit Performance Competitive costs Wider range of assets Can buy at discount Attractive yields Dividend increases Gearing 0% 10% 20% 30% 40% 50% 60% Source: AIC/Unbiased survey (n=290, October 2016) 4

5 Perceived barriers % of total respondents who saw each issue as a barrier Gearing Need to build knowledge Liquidity Not on my platform Compliance issues Risk ratings unavailable Discounts 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: AIC/Unbiased survey (n=290, October 2016) 5

6 Learning objectives Explain the differences between investment trusts and openended funds, and what they mean for the investor Describe the main functions of investment trusts in financial planning Identify the key metrics needed to analyse investment trusts, and understand how to interpret them 6

7 1. What makes us different 7

8 Some key similarities Diversified portfolios Professionally managed Defined mandate 8

9 But investment trusts Are companies with independent boards Can use gearing Are closedended Trade at discounts or premiums 9

10 Investment trust structure Shareholders (= investors in the fund) The board is in the driving seat, but they are only there to represent the shareholders, who have the final say The board Asset manager (contractor) 10

11 Fee changes since RDR 41% of investment trusts have changed their fees since 1 January 2013 Source: AIC (10/4/18). Ex defunct companies, ex VCTs. 11

12 Most common types of fee change investment trusts have reduced their base fees investment trusts have scrapped their performance fees investment trusts have introduced tiered fees 12

13 Low-cost investment trusts Investment trust Sector Ongoing charge Independent Investment Trust Global 0.25% City of London* UK Equity Income 0.42% Scottish Mortgage Global 0.44% Bankers* Global 0.44% Scottish Investment Trust Global 0.47% Mercantile UK All Companies 0.50% Foreign & Colonial* Global 0.53% Edinburgh Investment Trust* UK Equity Income 0.60% Source: AIC (3/4/18). None of these trusts pays a performance fee. * Performance fee abolished since 1/1/

14 Discounts and premiums NAV/share = 100p 95p 100p 105p Share price = 95p 5% discount Share price = 105p 5% premium 14

15 Discounts example Edinburgh Investment Trust Share price NAV Source: AIC using Morningstar 15

16 Discount chart Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr Edinburgh Investment Trust discount (%) -15 Source: AIC using Morningstar 16

17 Sentiment drives discounts 17

18 Discount peaks and troughs Average investment company discount (%) since Russian debt default Credit crunch EU ref Source: Morningstar. Month end data. Ex VCTs, ex 3i. 18

19 Discounts follow fashions Property Specialist 2% Property Direct - UK -1% Infrastructure UK Equity Income Industry average UK All Companies UK Smaller Companies Global Emerging Markets Private Equity -15% -1% -3% -5% -7% -10% -10% Source: Morningstar (as at 30/3/18, ex-3i) 19

20 How gearing works Gearing Borrowings Net assets 100 For example: Total assets = 100m 13m Borrowings = 13m Net assets = 87m 87m % 20

21 The impact of gearing Market goes UP 10%! Before market move Total assets = 100m Borrowings = 13m Net assets = 87m Total assets =??? Borrowings =??? Net assets =??? Market goes DOWN 10%! Total assets =??? Borrowings =??? Net assets =??? 21

22 The impact of gearing Market goes UP 10%! Before market move Total assets = 100m Borrowings = 13m Net assets = 87m Total assets = 110m 11.5% Borrowings = 13m Net assets = 97m Market goes DOWN 10%! -11.5% Total assets = 90m Borrowings = 13m Net assets = 77m 22

23 How gearing feels Like this? Or like this? Or maybe this? 23

24 Gearing numbers to know Current gearing (borrowings/net assets) Edinburgh Investment Trust Gearing: 9 Historic gearing: 17 / 5 Gearing range: 0-25 Highest and lowest gearing over past three years Minimum and maximum gearing expected in future 24

25 What makes us different We re closed-ended We re companies quoted on the LSE We trade at discounts or premiums to NAV We can gear We re run by boards 25

26 2. What to use investment trusts for For income For growing wealth long-term To access alternative assets 26

27 Dividend heroes Investment trust Sector Consecutive years of dividend increase City of London Investment Trust UK Equity Income 51 years Bankers Global 51 years Alliance Trust Global 51 years Caledonia Investments Global 50 years F&C Global Smaller Companies Global 47 years Foreign & Colonial Global 47 years Brunner Global 46 years Source: AIC (19/4/18) 27

28 Dividend heroes (2) Investment trust Sector Consecutive years of dividend increase JPMorgan Claverhouse UK Equity Income 45 years Murray Income UK Equity Income 44 years Witan Global 43 years Scottish American Global Equity Income 38 years Merchants Trust UK Equity Income 36 years Scottish Mortgage Global 35 years Scottish Invt Trust Global 34 years Source: AIC (19/4/18) 28

29 How do they do it? 15% of income may be held in reserve for future 29

30 How it works: City of London Pence per share INCOME EARNED INCOME EARNED DIVIDEND PAID DIVIDENDS PAID FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Source: Company reports 30

31 Dividends at City of London Asian crisis Dotcom crash Iraq war Credit crunch BP oil spill Oil price collapse EU ref Source: Morningstar 31

32 UK Equity Income sector (average) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Income received each year on 100,000 portfolio 4.6% p.a. RPI: 2.8% p.a. Source: AIC using Morningstar (calendar years). AIC UK Equity Income sector average performance. 32

33 UK Equity Income sector (average) 200,000 Capital growth of 100,000 (if all income taken) 200, , ,000 50,000 0 Source: AIC using Morningstar (calendar years). AIC UK Equity Income sector average performance. 33

34 Another income feature Dividends Capital profits This is unusual for investment trusts, but common for VCTs. 34

35 Dividends from capital profits Use the AIC s website to find out if an investment company has paid dividends from capital profits. view/dividends 35

36 For growing wealth long-term Annualised total returns (%) 1 year 3 years 5 years 10 years FTSE All-Share Open-ended funds Investment companies Source: Morningstar (share price total return to 31/3/18) 36

37 Sister funds Standard Life UK Smaller Companies OEIC Standard Life UK Smaller Companies IT 37

38 How many investment trusts outperformed? (5 years to 30/11/17) Share price basis 36 out of 45 (80%) NAV basis 34 out of 45 (76%) Source: Winterflood December 2017 monthly report 38

39 Outperformance of investment company versus sister open-ended fund (%) Source: Winterflood December 2017 monthly report. Five years to 30/11/17. Based on NAV returns 39

40 Why might investment trusts outperform open-ended funds? Gearing No cash drag Less likely to get too big Inclusion of illiquid assets Managers take long view 40

41 The open-ended problem They are forced to buy here and sell here. 41

42 Open-ended equity fund flows ve returns * ve returns (%TR) INFLOWS ( bn) OUTFLOWS Source: Investment Association/Morningstar (FTSE World index). * 2017 to 30 Nov. 42

43 Access to alternatives Infrastructure Specialist debt VCTs Leasing Commercial property 43

44 Why closed-ended funds suit illiquid assets Openended fund Closedended fund CRASH Wider discount Gating 44

45 Property funds, open-ended versus closed-ended Share price total return (%) 1 year 3 years 5 years 10 years Open-ended Closed-ended NAV total return (%) 1 year 3 years 5 years 10 years Open-ended Yield: 2.76% Yield: 4.68% Closed-ended Source: AIC using Morningstar (periods to 31/3/18). Includes funds in Morningstar Property Direct UK sector. 45

46 Recap: What to use investment trusts for For income For growing wealth long-term To access alternative assets 46

47 3. The practicalities How to research How to buy First steps 47

48 Researching investment trusts Some extras Your normal process for OEICs Your normal process for OEICs Other factors Premium / discount NAV returns Gearing Liquidity 48

49 Discount control policies Investment trusts can buy back some of their own shares for cancellation. The aim is to reduce the discount, but buying back shares at a discount also raises the NAV/share. Shares bought back Investment trust 49

50 72% of investment trusts now have a discount control policy DCP trigger 0-2% ("zero discount policies") No DCP DCP trigger 5% DCP trigger >5% DCP, no set trigger Source: AIC (15/3/18) 50

51 Is liquidity an issue? Biggest 25% Next biggest 25% Next biggest 25% Smallest 25% 1.3m 378, ,000 70,000 Average daily value of shares traded Source: Winterflood Securities (data relates to May 2015) 51

52 Platform availability Coming soon to 52

53 Platform cost comparison Estimated platform costs for various mixed portfolios of investment trusts and openended funds, held inside or outside model portfolios, are available on the AIC s website. It s free to view but you need to register. Aegon Retirement Choices 25,000 50, , , ,000 1,000,000 AJ Bell Investcentre 0.36% 0.28% 0.56% 0.25% 0.22% 0.21% Alliance Trust Savings(inclusive charge option) 1.38% 0.69% 0.92% 0.37% 0.18% 0.09% Alliance Trust Savings(standard charge) Ascentric 0.72% 0.36% 0.30% 0.30% 0.30% 0.30% Aviva Platform 0.65% 0.45% 0.61% 0.42% 0.32% 0.23% Cofunds Elevate 0.45% 0.40% 0.43% 0.39% 0.37% 0.31% FundsNetwork 0.43% 0.34% 0.30% 0.27% 0.26% 0.26% Hubwise 0.22% 0.21% 0.26% 0.23% 0.20% 0.10% Novia Nucleus 0.56% 0.45% 0.51% 0.41% 0.38% 0.28% OMW Praemium 0.62% 0.46% 0.38% 0.33% 0.32% 0.31% Raymond James - Option % 0.30% Raymond James - Option % 1.25% Raymond James - Option % 2.43% Seven IM 0.30% 0.30% 0.30% 0.30% 0.30% 0.28% Standard Life Wrap 0.56% 0.48% 0.59% 0.49% 0.43% 0.35% Transact 0.79% 0.73% 0.74% 0.53% 0.51% 0.45% True Potential 0.62% 0.51% 0.68% 0.51% 0.46% 0.43% Zurich Intermediary Platform 0.52% 0.43% 0.55% 0.40% 0.34% 0.30% Sample heatmap from AIC website (please go to website for up-to-date information and full explanation). 53

54 Useful information sources Data and statistics Third-party research Company reports National and trade press 54

55 Comparing two investment trusts vs. City of London (Job Curtis) Lowland (James Henderson) 55

56 Which investment trust would you recommend for each client? 40-year-old in highly paid job saving for pension, plans to retire at year-old using investment income for living expenses 56

57 First steps >2,000 open-ended funds 400 investment trusts 57

58 Start with a core The rest A few specialists Core choices 58

59 Master Adviser core portfolio City of London Foreign & Colonial Merchants Trust Murray Income Murray International Perpetual Income and Growth Source: Master Adviser (10/6/15) 59

60 Consider sister funds OEIC Investment trust Buy at NAV Same manager, buy at 10% discount! 60

61 Use for alternative asset classes Property Specialist debt OEICs Infrastructure Frontier markets VCTs 61

62 Blend into retirement income portfolios Investment trusts Annuity Cash and fixed interest Income 62

63 Learning outcomes Explain the differences between investment trusts and openended funds, and what they mean for the investor Describe the main functions of investment trusts in financial planning Identify the key metrics needed to analyse investment trusts, and understand how to interpret them 63

64 Disclaimer Any information contained in this presentation has been prepared for information purposes only. Whilst the AIC / AIC Information Services Limited has taken all reasonable steps to verify such information, it does not accept responsibility for any errors or omissions or for losses of any nature incurred by any person howsoever caused. The information contained in this presentation does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. This presentation may not be printed, reproduced or further distributed to any other person or published, in whole or in part, for any purpose. Please refer to /aic/terms-of-use/ for further information relating to our disclaimer policy. The Association of Investment Companies (AIC) is a company limited by guarantee whose registered office is 9th Floor, 24 Chiswell Street, London. EC1Y 4YY. Its trading and registered office addresses are identical. The AIC is a company registered in England and Wales and its company registration no. is The AIC is registered for VAT and its registration no. is AIC Information Services Limited is a company registered in England and Wales with registration no

65 Next steps Register on as a financial adviser to get access to more stats and take online training courses. 65

66 Stay in touch Nick Britton Tel: