The Lemon Fool

Why is it that unit trusts are more popular than investment trusts?

As far as I can see, unit trusts are opaque, expensive and poorly governed - great for the fund manager, but bad for the investor. Why would a truly independent financial advisor or stock broker recommend such a fund when there are excellent index trackers and investment trustss available?

LooseCannon101 wrote:Why would a truly independent financial advisor or stock broker recommend such a fund when there are excellent index trackers and investment trustss available?

Historically you would follow the commission. Advisors got sales commission on Unit Trusts. Stockbrokers would advise on stock picking and perhaps charge for their services. With ITs it's the internal managers who do the churning, so no ongoing commission for the broker.

That Investment Trusts can stand at a premium or discount can be a problem as you don't really know whether you are buying or selling at a completely fair price.

Historically as well, the unit trust industry had the charge levels to splash out on marketing direct to consumers. With the growth of online platforms, ITs have become more visible and are now a little easier than ITs to buy and sell because they have a continuously available price.

An Index Tracker can either be an OEIC (Open Ended Investment Company, the modern equivalent of a unit trust) or an ETF (Exchange Traded Fund).

LooseCannon101 wrote:Why is it that unit trusts are more popular than investment trusts?

As far as I can see, unit trusts are opaque, expensive and poorly governed - great for the fund manager, but bad for the investor. Why would a truly independent financial advisor or stock broker recommend such a fund when there are excellent index trackers and investment trustss available?

* Free trading on many platforms
* Very small minimum amounts possible i.e. £100
* No stamp duty
* No premiums/discounts to worry about
* FSCS cover (I think)

I heard a story on Radio 4's Moneybox on saturday, (which if I picked it up correctly), whereby an investor had submitted a sell order to HL on the Woodford OIEC on the friday morning. When she heard on the Monday afternoon that trading had been suspended on the Monday afternoon, she breathed a sigh of relief, believing that she had already sold.

She then later found out that her sale had not been acted upon, as HL had actioned their bundled sales at c 09.00 on the friday morning, just before her order had been received. So HL had then sat on the order throughout friday and over the weekend (as one would expect), and had been in the process of accumulating it along with other orders during Monday, but it still hadn't been acted upon/traded when Woodford suspended trading Monday PM.

Another good reason, for me, to prefer IT's, which one can trade more or less instantly like stocks.

LooseCannon101,

There are some good reasons to use Unit Trusts. I use both UT's and IT's. Things I look out for include: -

You can buy a UT like Lindsell Train Global Equity at NAV, whereas the IT is at an eyewatering premium.

The bid / offer spread of some IT's can be quite off putting when buying or selling. Also smaller IT's can be hard to sell if there's no market for them.

UT's and IT's that act like closet index trackers are usually poor value. City of London IT is one I've always considered a Closet Tracker. There are plenty of UT's that are Closet Trackers as well. Buy a Tracker or ETF instead.

IT's really start to outperform UT's when you hold them for a good while. A lot of investors buy and sell long before the IT outperformance kicks in. Just take a look at many investors on this site.

Hope that explains why some of us use both types of investment.

Eddie

I believe unit trusts to be more popular because of the ignorance of the general investing public who are preyed upon by unscrupulous sharks i.e. financial advisors and stockbrokers. There is simply more money to be made by selling these products which can then be churned each year under the pretence of 'rebalancing'.

The directors of an investment trust can and do sack a fund management company if the latter underperforms or moves away from the directors' remit. The fund manager of a unit trust effectively answers to no one while reaping outsize pay cheques.

I wonder how many experienced investors would take note of advice were it given to them by large, 'respectable' organisations who advertise in the business sections of serious newspapers? Probably not many. Unfortunately, many unsuspecting people are extremely trusting of such organisations.

And other things that I like about UTs/OEICs, when compared to conventional ITs (I hold both):-
The convenience of the automatic re-investment of dividends in a UT/OEIC at zero cost, rather than having to wait accumulating IT dividends until they make a further IT purchase economically sensible.
ITs tend to be generalist, whereas there are UTs/OEICs with specialist cover in all areas.
And sometimes there are UTs/OEICs that are simply better investments than many highly regarded ITs. - e.g. in Global investments, compare the 5 year total return performance of Global UTs/OEICs Fundsmith (171.24%) and Lindsell Train Global Equity (168.61%) against popular Global ITs - Witan IT (63.49%) , Alliance IT (93.93%), Foreign and Commonwealth IT (103.88%) and Scottish Mortgage IT (162.1%). (figures from Hargreaves Lansdown)

On to the other point about the HL order times of OEICs/UTs, their policy is clearly stated:-
"Providing the fund values at midday or later, deals for the same day's price will need to be placed by 8am online. If you are dealing over the telephone, we would need the order by 5pm the previous day. We may be able to place a deal on the same day for a midday or later valuing fund up to 9am, but this cannot be guaranteed."
But then - UTs and OEICs are not day-trading objects - so I can't see why this is a problem.

scotia wrote:But then - UTs and OEICs are not day-trading objects - so I can't see why this is a problem.

A recent personal example was that I was "harvesting" a year end capital gain from an OEIC. Given that I didn't know the price at which I was selling, it was guesswork as to how much could be sold to remain within the CGT allowance. Had I been selling an IT at a quoted price, I could have been more exact instead of having to leave a margin for price movement.

scotia wrote:And other things that I like about UTs/OEICs, when compared to conventional ITs (I hold both):-
The convenience of the automatic re-investment of dividends in a UT/OEIC at zero cost, rather than having to wait accumulating IT dividends until they make a further IT purchase economically sensible.
ITs tend to be generalist, whereas there are UTs/OEICs with specialist cover in all areas.
And sometimes there are UTs/OEICs that are simply better investments than many highly regarded ITs. - e.g. in Global investments, compare the 5 year total return performance of Global UTs/OEICs Fundsmith (171.24%) and Lindsell Train Global Equity (168.61%) against popular Global ITs - Witan IT (63.49%) , Alliance IT (93.93%), Foreign and Commonwealth IT (103.88%) and Scottish Mortgage IT (162.1%). (figures from Hargreaves Lansdown)

On to the other point about the HL order times of OEICs/UTs, their policy is clearly stated:-
"Providing the fund values at midday or later, deals for the same day's price will need to be placed by 8am online. If you are dealing over the telephone, we would need the order by 5pm the previous day. We may be able to place a deal on the same day for a midday or later valuing fund up to 9am, but this cannot be guaranteed."
But then - UTs and OEICs are not day-trading objects - so I can't see why this is a problem.

The unit trusts mentioned are very much outliers. Fundsmith is a highly concentrated fund set up at the start of a strong bull market in 2010.

BMO Asset Management, F&C IT''s management company, has a low-cost savings plan (£72 per annum for an ISA) where dividends can be re-invested automatically free of charge.

LooseCannon101 wrote:The unit trusts mentioned are very much outliers. Fundsmith is a highly concentrated fund set up at the start of a strong bull market in 2010.
BMO Asset Management, F&C IT''s management company, has a low-cost savings plan (£72 per annum for an ISA) where dividends can be re-invested automatically free of charge.

Outliers they may be, but they are extremely popular with investors, which is what is being discussed. Fundsmith is £17.17B and Lindsell Train s £7.1B in size. The Scottish Mortgage IT, which is also clearly an Outlier in the IT world is £8.2B in size.
If we dismiss outliers (although clearly investors do not), it is reasonably easy to select Global UTs/OEICs which are competitive with a range of popular Global ITs.
Concerning your point on the BMO low cost savings plan - I much prefer to use an independent financial provider which allows the selection of a wide range of funds and ITs. I would never advise a beginning investor to get stuck with an in-house ISA provider.
But I have no axe to grind in this matter - I hold UTs/OEICs, ITs, ETFs, VCTs and Shares. I just feel that the suggestion of others that UTs/OEICs is only the investment of choice for those that know no better requires a reasoned response to the contrary.

Unit trust managers spend a huge amount on newspaper advertising and, dare I suggest, that is the major factor in most financial commentators in newspapers almost always talking about 'funds' as if they are the only equity investment vehicle to be used.

I wouldn't use the term 'popularity', it's simply that most private investors absorb the press propaganda in favour of funds. If this situation ever changes the profits of firms like HL are going to take a sharp downturn.

scrumpyjack wrote:Unit trust managers spend a huge amount on newspaper advertising and, dare I suggest, that is the major factor in most financial commentators in newspapers almost always talking about 'funds' as if they are the only equity investment vehicle to be used.
I wouldn't use the term 'popularity', it's simply that most private investors absorb the press propaganda in favour of funds. If this situation ever changes the profits of firms like HL are going to take a sharp downturn.

I must read the wrong newspapers. I can't recollect seeing any Fund or IT advertisements. Looking at the Business pages in the (Glasgow) Herald today, I can see tables of both IT and Fund prices. The only mention of anything related to our discussions is a brief note in shares comments that Hargreaves Lansdown shares regained some value after its boss indicated he will not be taking a bonus this year wrt the Woodford Saga. Maybe readers should switch to the Herald for unbiased reports?

I think it is down to inexperienced investors seeking advice. They are invariably directed towards comission paying investments, from which the advisor will benefit. There is also the power of advertising to contend with. Most of the adverts in the "Money" sections of the weekend papers, as opposed to the "Business" sections, are for funds, occasionally for ITs. The editorial items about investing invariably use fund managers, who tend to promote their own and similar products.

TJH

Unit Trusts are a good way to get started with low sums of cash. For example, I have my daughter in 3 on a monthly investment plan.

Dumbo wrote:City of London IT is one I've always considered a Closet Tracker.

Not so:

viewtopic.php?p=228690#p228690

Using gearing, discount control, option-writing, revenue reserving and other devices available to investment trusts, it would be difficult for one to behave as a closet tracker even if it wanted to-- except for short periods by accident.

Whenever you look at an attribution analysis of performance for a mainstream equity IT, you realise that stockpicking is less than the half of it. The only overt UK tracker in the IT business, Aberdeen, packed it in a few years back because too few wanted such a beastie:

https://www.telegraph.co.uk/investing/f ... ar-merger/

Luniversal,

Well if you compare performance over a period of 1 - 5 years there's barely any difference. You can check this on the LSE website but I'm sure you don't need to.

It's only if you hold on to City of London for much longer periods that the outperformance against the FTSE100 begins to pay off. I wonder how many investors on these boards would be willing to do that?

All the best.

Eddie

Dumbo wrote:Luniversal,

Well if you compare performance over a period of 1 - 5 years there's barely any difference. You can check this on the LSE website but I'm sure you don't need to.

It's only if you hold on to City of London for much longer periods that the outperformance against the FTSE100 begins to pay off. I wonder how many investors on these boards would be willing to do that?

Luniversal's views in this area are distinctly contrarian. He believes, for instance, that you are diversified if you hold 7 or 8 ITs that all fish in the same waters (say, the FTSE-350HY). He argues that because they all weight differently between the usual suspect HY shares, that is diversification. He is correct that there is a dispersion of outcomes, but in my view he confuses that with true diversification.

I'd tend to agree with you that CTY is a closet FTSE-100 tracker, since its main holdings correspond closely to the big hitters of the FTSE-100. It might give a different outcome over certain time periods because of factors like weighting and gearing. But if there are only half a dozen types of fish in the river you are fishing in, then folks are going home that night with similar items for supper.

The danger with ITs like CTY is that you pay active costs for passive performance. I'd rather use ITs for more obscure areas of the markets, like emerging markets, private equity and biotech. The broad and generalist ITs were in decline even before ETFs ate their lunch.

I like IT’s but for a novice investor they must contend with additional volatility from the discount and the effect of gearing. An advisor has more work to do when explaining Investment Trusts and might feel the benefits are not sufficient to justify his efforts.

Some Unit Trusts are low cost and some platforms are not more expensive to hold unit trusts over IT’s and ETFS , there is room for both.

Although after the Woodford debacle I would not be surprised to find that we might see changes with Init Trusts/OEICs, perhaps a board of directors to oversee investors interests and further restrictions on illiquid investments ( ITs are much better suited here)

Hariseldon58 wrote:Although after the Woodford debacle I would not be surprised to find that we might see changes with Init Trusts/OEICs, perhaps a board of directors to oversee investors interests and further restrictions on illiquid investments

Elsewhere on this forum there's a link to a letter from the FSA to the Treasury Select Committee on Finance etc. What it discloses is that the FSA's powers are direct over investment houses but indirect over the individuals as fund managers making the decisions. Arguably that works when the investment house ( M&G etc) is the bigger name, but not where it's the fund manager that's the name and the notional investment house something you've never heard of.

Alaric wrote:Elsewhere on this forum there's a link to a letter from the FSA to the Treasury Select Committee on Finance etc. ...

The link to the FCA's letter dated 18 June 2019 is available via here:

viewtopic.php?p=230556#p230556