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Haig Bathgate: the obscure world of investment trust IPOs

by Haig Bathgate on Mar 28, 2014 at 10:39

Haig Bathgate: the obscure world of investment trust IPOs

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.

Fee downsides

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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1 comment so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Mar 28, 2014 at 15:36

He is spot on in all his arguments. The issue expenses should be paid for by the investment manager.. that said lots of issues are getting away and investors (mainly private client stockbrokers / discretionary managers) seem happy to pay the fees... history tells us that no fund stays at a premium.. maybe the infrastructure funds will prove its "different this time".

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