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Haig Bathgate: the obscure world of investment trust IPOs
by Haig Bathgate on Mar 28, 2014 at 10:39
The job of an investment manager is to be sceptical – I don’t take anything as read.
Therefore, when any segment of the market – whether industry, region or security – gets very positive press, I get wary. For me, one such segment is investment trusts.
Before I launch into the negatives, it is worth noting the positives of their structure. Operating with a fixed amount of equity capital enables managers to take a long-term approach to both investment and tax-related issues.
One notable downside, however, is that as investment trusts’ prices are not fixed to the underlying asset value and will typically trade at a discount or premium, so the share price is more volatile than the underlying asset value.
This higher volatility has been exacerbated by the increased use of firm-wide wealth manager buy lists, where appearing on one can shift demand so high that it raises the premium, and a removal can widen the discount.
But by far the biggest problem I have with trusts is the high fees investors have to pay to access the funds at an initial share sale.
I was recently asked to participate in a fund launch, but I could not give it serious consideration, even though it might have been a good investment, because of the 2% fee that had to be paid just to buy the shares.
In other words, had I paid a pound of client money towards this fund, they would have ended up with an investment of 98p from day one.
For an investment that might display a discount to underlying value, the 2% charge raises the breakeven hurdle for me just that bit too far to make it worthwhile.
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