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David Kempton: My top investment trust picks
Markets
by David Kempton on Nov 19, 2009 at 00:01
I sold a business some years ago and for the first time in my life I had a meaningful sum of money to invest. I did what most people do under such circumstances and gave my money to a well known London fund manager (now defunct) to look after, whilst retaining a little myself to fiddle around with.
After about two years my funds were depleted by more than 20% whilst an investment trust run by the same house was well into positive territory.
I tried to determine why but they were masterly at excuses which became increasingly weaker.
I was cynical enough to think that their investment trust was their window on the world and received much more attention than my meagre deposit. Happily fund managers today are much more diligent although still of very variable quality.
I took my money away and invested in their investment trust, but additionally I spent some time studying other quoted investment trusts and found a whole new world. For some years thereafter I only invested in that sector and had such success that I saw no reason to invest elsewhere.
Today my investments are much more far reaching, but I have several very knowledgeable colleagues who still invest entirely in that sector.
Investment trusts have their own cycles and whilst the ups and downs of the sector normally mirror global markets, the good times tend to be better and the bad times worse.
Hence in strong markets well regarded trusts tend to run at premiums, whereby the share price exceeds the asset backing per share. Alternatively, when markets are depressed, large discounts occur which enables some very well managed trusts to be bought at 20% discounts, even up to 30% in some instances. The North Atlantic Smaller Companies Trust is very well managed with a terrific long term performance, yet still has a near 30% discount. I have owned it for years, but it is still an attractive buy, and sometime soon the managers must unitise it to achieve a significant uplift.
Competition for the sector comes from open ended unitised funds, unit trusts, OEICs and ETFs. Since these are bought exactly at asset value, there is no opportunity to find a discounted bargain.
In strong markets investment trusts can enhance their performance with gearing; a practice not permitted in unitised funds.
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