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"Investment Trusts are risky" says Financial Advisor

Closed-end funds and OEICs
funduffer
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"Investment Trusts are risky" says Financial Advisor

#353297

Postby funduffer » November 4th, 2020, 8:48 am

I am helping my sister with her finances, as she has recently come into a substantial legacy.

We are consulting a Financial Advisor, and during a recent meeting, the the FA commented on the fact that my sister held some shares in City of London IT (CTY), that "of course IT's are much riskier than UT's because they are allowed to borrow, although their charges are generally lower than UT's"

She also commented on my sister's holding in Vanguard World Index fund (VRWL), in saying that "of course during a down-turn index funds will generally do worse than UT's".

Aren't both these statements myths?

Obviously, there will be specific examples of risky IT's and UT's, but it is difficult to believe a long-standing IT like CTY could be described as risky against the universe of mainstream UT's!

Also, I would have thought their was no real evidence of global index funds doing worse in a downturn than mainstream UT's, although there will obviously be examples of some that do beat the index, at least temporarily.

It is comments like these that put me off Financial Advisors.

Maybe I am biased, as I held Woodford's fund, which was a poor investment, and my IT's have delivered for me generally?

Would be interested in any counter views.

FD

scrumpyjack
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Re: "Investment Trusts are risky" says Financial Advisor

#353302

Postby scrumpyjack » November 4th, 2020, 9:02 am

Well there are good ITs and less good ITs, just as there are with funds.

The borrowing point goes both ways. Most IT’s borrowing levels are very small and, if markets go up on average, will be beneficial. I guess most people expect markets on average to go up.

The factor that could be argued that makes funds riskier than ITs is that they can be forced sellers of shareholdings to meet redemptions, as Mr Woodford discovered. ITs can never be forced sellers, so can take a long term view more easily and ride through periods of market turbulence.

Also Funds never sell at a discount, whereas you can often pick up IT shares at a discount to NAV.

I am very sceptical of FAs advice as I suspect you are. If I were being cynical I might suspect that their advice is coloured by the need to justify all the platform and other fees that tend to be much lower/non existent with ITs.

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Re: "Investment Trusts are risky" says Financial Advisor

#353309

Postby jackdaww » November 4th, 2020, 9:14 am

dont IFA's have an agenda?

would it be unfair to compare them to used car dealers ?

:?

Dod101
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Re: "Investment Trusts are risky" says Financial Advisor

#353312

Postby Dod101 » November 4th, 2020, 9:17 am

I long ago became very sceptical of any advice from IFAs. Either it is self serving or will be based on what they are taught to get through their exams to qualify. You or your sister would be much better off listening to people who write in this sort of forum who have got real life experience. Any equity investment is risky, ITs less so I think than single share investments because of course you get an instant spread. To say that because they can borrow they are more risky is silly. The trouble is that the majority of people an IFA will be dealing with have probably got no idea or interest in investments and so simply accept what they say.

Why consult an IFA anyway?

Asset allocation comes first, followed by an assessment of what the aim of the equity investment is and invest accordingly.

Dod

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Re: "Investment Trusts are risky" says Financial Advisor

#353314

Postby richfool » November 4th, 2020, 9:19 am

funduffer wrote:I am helping my sister with her finances, as she has recently come into a substantial legacy.

We are consulting a Financial Advisor, and during a recent meeting, the the FA commented on the fact that my sister held some shares in City of London IT (CTY), that "of course IT's are much riskier than UT's because they are allowed to borrow, although their charges are generally lower than UT's"

She also commented on my sister's holding in Vanguard World Index fund (VRWL), in saying that "of course during a down-turn index funds will generally do worse than UT's".

Aren't both these statements myths?

Obviously, there will be specific examples of risky IT's and UT's, but it is difficult to believe a long-standing IT like CTY could be described as risky against the universe of mainstream UT's!

Also, I would have thought their was no real evidence of global index funds doing worse in a downturn than mainstream UT's, although there will obviously be examples of some that do beat the index, at least temporarily.

It is comments like these that put me off Financial Advisors.

Maybe I am biased, as I held Woodford's fund, which was a poor investment, and my IT's have delivered for me generally?

Would be interested in any counter views.

FD

But I bet the IFA didn't mention that Investment Trusts often trade at a discount and thus one can effectively pick up major stocks at discounts.

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Re: "Investment Trusts are risky" says Financial Advisor

#353317

Postby Urbandreamer » November 4th, 2020, 9:29 am

funduffer wrote:....
It is comments like these that put me off Financial Advisors.

Maybe I am biased, as I held Woodford's fund, which was a poor investment, and my IT's have delivered for me generally?

Would be interested in any counter views.

FD


I wouldn't actually disagree with the statements that you quote, though I wouldn't place the emphasis upon them that you do.

In theory IT's ARE more risky if they use gearing. In practice they tend to get better returns over the long term than UT''s. IMHO they have a number of distinct advantages, however a friend disagrees. It's something that could be debated ad-infinitum.

I certainly would argue that UT's are not suited for illiquid investments and feel that is where Woodford and others have gone wrong. Then again, illiquid investments, in and of themselves, tend to be more risky than liquid ones.

Index trackers will fall with the index in a downturn. They are after all designed to track the index. Many UT's and IT's would fall likewise, which raises the question of if they are closit trackers. CTY* (which I also own) is just one such which questions could be raised about. However you can select others that are less likely to track an index, or even ones intended for wealth preservation.

At the end of the day we should all chose investments to fit out needs and desires. If you employ a FA, they will need to establish your needs and desires. The statements that you quote are to some extent partially true and would evoke a response from your sister about the downside of owning such investments. The fact that they also guide towards UT's may be a biase that the FA has, simply because they know more about UT's.

*I own CTY for income. It's remit it to derive income mostly from big UK companies. Hence there will be a strong corrilation between it and the FTSE 100, as that is the index of the 100 bigest UK companies. There is sufficient difference in income that I believe the managers earn their fee, though performance isn't great.

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Re: "Investment Trusts are risky" says Financial Advisor

#353352

Postby bluedonkey » November 4th, 2020, 10:33 am

I did quite a lot of financial adviser exams many years ago. They are taught a very prescribed view of investments. It's not particularly sophisticated.

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Re: "Investment Trusts are risky" says Financial Advisor

#353477

Postby DavidM13 » November 4th, 2020, 4:39 pm

Hangover from the days of trail commissions?
Operational or process issues with purchasing or reporting or even just researching?
Education & Knowledge of the structure?
Sales teams of funds dont contact them on CEFs? Why would they! Better to grow AUM on the OE vehicles.

All possible, but instead of ever admitting to them it is easier to bandy around terms such as risky, volatility, discount or gearing until the person opposite has fallen asleep. Any adviser would rather say that they are risky so I don't have them as any form of my client solution than "I don't really know how they operate.."

I would ask for numbers to back up the Vanguard comment personally.....

Also some of the ICs have locked in long-term super cheap debt of around 2%. If they don't think they can beat that over the medium to long term then we are all in the wrong game. Given an OE fund and its geared sister IC it is really a no brainer all other things being equal (especially if you are on a relatively wide discount compared to its average)

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Re: "Investment Trusts are risky" says Financial Advisor

#353481

Postby Alaric » November 4th, 2020, 4:58 pm

DavidM13 wrote:Hangover from the days of trail commissions?


Also a question of access. There are a number of OEICs that are only marketed through Financial Advisers. ITs being direct stock market investments are available to anyone with a broker account. It's also a point that Financial Advisers have a reluctance to recommend direct stock market investment. That may well be the FCA's influence in how it polices the advice given.

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Re: "Investment Trusts are risky" says Financial Advisor

#353490

Postby UncleEbenezer » November 4th, 2020, 5:31 pm

funduffer wrote:I am helping my sister with her finances, as she has recently come into a substantial legacy.

We are consulting a Financial Advisor, and during a recent meeting, the the FA commented on the fact that my sister held some shares in City of London IT (CTY), that "of course IT's are much riskier than UT's because they are allowed to borrow, although their charges are generally lower than UT's"

If an IT does borrow to invest, that certainly raises the risk. Sites like the AIC contain information on gearing: I tend to avoid ITs where it's high.

Another risk with ITs is the discount/premium. In a sharp market downturn, your UT might drop 10% while a similar IT drops 30% as the small premium becomes a big discount.

Of course all those risks mirror the rewards when things work in your favour!

She also commented on my sister's holding in Vanguard World Index fund (VRWL), in saying that "of course during a down-turn index funds will generally do worse than UT's".


That's not at all obvious to me. Is that claim based on any serious data?

Maybe I am biased, as I held Woodford's fund, which was a poor investment, and my IT's have delivered for me generally?


That's been discussed at great length on these boards: the issue on which he came a cropper was (lack of) liquidity of the fund's investments. If that had been structured as an IT, you would (probably) always have been able to sell it, but the discount to NAV would have been extreme at times: you might have lost a lot more than investors who (had to) wait for their money. When an IT stands at a 98% discount to NAV, buying is a pure gamble, but more realistically I've made a (minor - never gambled very much on them) killing buying at 60-70% discounts.

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Re: "Investment Trusts are risky" says Financial Advisor

#353543

Postby Adamski » November 4th, 2020, 9:41 pm

To give a counter view. Most investors underperform a tracker, or chosen benchmark because they get greedy on the way up, and panic sell on the way down. For many people an IFA can be useful to give a structured system. As what we do (have a system and stick with it, run winners, not panic sell) is too difficult for most people to handle.

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Re: "Investment Trusts are risky" says Financial Advisor

#353548

Postby Urbandreamer » November 4th, 2020, 9:47 pm

Alaric wrote:Also a question of access. There are a number of OEICs that are only marketed through Financial Advisers.


Indeed. There is also a product known as a "structured product". There was a time when you could buy one through your building society. I did!

Then there was a miss selling issue and now you can ONLY buy one if advised by a FA/IFA.

They are in fact complicated things. However they allow you to select a risk/reward level* in a single product. Rather than achieving it through personally picking a portfolio. IF you want one in this country, you can only get one with the help of a FA/IFA.

*Ie 80% of the gain in the index or your initial capital back after five years if it's underwater. Numbers picked at random, but that's the idea. The one I took out was 100% of the gain in the FTSE 100, unless one of three markets was underwater. However that was a different time.

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Re: "Investment Trusts are risky" says Financial Advisor

#353654

Postby Alaric » November 5th, 2020, 9:33 am

Urbandreamer wrote:*Ie 80% of the gain in the index or your initial capital back after five years if it's underwater. Numbers picked at random, but that's the idea. The one I took out was 100% of the gain in the FTSE 100, unless one of three markets was underwater. However that was a different time.


The problem with those products is that there's no way for the consumer or even the IFA to know whether the price is fair. Is the annual charge equivalent to 0.2% a year or is it 2.0%? Perhaps the only indication is that if the commission is disclosed, that the higher the commission, the worse the intrinsic value of the product.

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Re: "Investment Trusts are risky" says Financial Advisor

#353658

Postby scrumpyjack » November 5th, 2020, 9:41 am

Alaric wrote:
Urbandreamer wrote:*Ie 80% of the gain in the index or your initial capital back after five years if it's underwater. Numbers picked at random, but that's the idea. The one I took out was 100% of the gain in the FTSE 100, unless one of three markets was underwater. However that was a different time.


The problem with those products is that there's no way for the consumer or even the IFA to know whether the price is fair. Is the annual charge equivalent to 0.2% a year or is it 2.0%? Perhaps the only indication is that if the commission is disclosed, that the higher the commission, the worse the intrinsic value of the product.


I have a deep prejudice that all these 'financial products' are simply mechanisms to extract fees from the unsuspecting investor. I would never touch them with a bargepole.

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Re: "Investment Trusts are risky" says Financial Advisor

#353662

Postby UncleEbenezer » November 5th, 2020, 9:46 am

scrumpyjack wrote:I have a deep prejudice that all these 'financial products' are simply mechanisms to extract fees from the unsuspecting investor. I would never touch them with a bargepole.

What's a financial product? A coin? A note? An IOU? A bank account? A Blue Chip share? An investment vehicle such as an IT or UT? An offshore trust? A donation?

Yeah, on reflection, they're all a bit dodgy.

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Re: "Investment Trusts are risky" says Financial Advisor

#353684

Postby Urbandreamer » November 5th, 2020, 10:13 am

scrumpyjack wrote:I have a deep prejudice that all these 'financial products' are simply mechanisms to extract fees from the unsuspecting investor. I would never touch them with a bargepole.


And you don't think that when you buy a loaf of bread?

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages


Financial advisers, insurance companies insurance brokers, estate agents, mortgage brokers, mortgage lenders........

Just like the baker we should expect them to offer their product out of charity, shouldn't we?

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Re: "Investment Trusts are risky" says Financial Advisor

#353692

Postby DavidM13 » November 5th, 2020, 10:38 am

Urbandreamer wrote:
Alaric wrote:Also a question of access. There are a number of OEICs that are only marketed through Financial Advisers.


Indeed. There is also a product known as a "structured product". There was a time when you could buy one through your building society. I did!

Then there was a miss selling issue and now you can ONLY buy one if advised by a FA/IFA.

They are in fact complicated things. However they allow you to select a risk/reward level* in a single product. Rather than achieving it through personally picking a portfolio. IF you want one in this country, you can only get one with the help of a FA/IFA.

*Ie 80% of the gain in the index or your initial capital back after five years if it's underwater. Numbers picked at random, but that's the idea. The one I took out was 100% of the gain in the FTSE 100, unless one of three markets was underwater. However that was a different time.


aaahhhhhhh!!! Dont bring back the nightmares. In a former life I worked for Fundamental Data (who remembers them?) and we set about adding all the listed (or ones where there were market makers striking prices) to our database. I sifted through dozens of prospectus to understand all the triggers about what they would pay out or when they would stop paying dividends. They had rules such as "Start at 100p and the FTSE is at 4,000. If the FTSE Ends up at 5,000 after 5 years you will get 200p, UNLESS the FTSE dips under 3,678 even for just one day within the period. Then you get tuppence back"

I make up the figures clearly, but those were the sorts of intricacies and that is just a simple one I remember.

I think i spent about 200 hours buildings a database and a daily list and our revenue for the endevour was £0.

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Re: "Investment Trusts are risky" says Financial Advisor

#353704

Postby scrumpyjack » November 5th, 2020, 11:02 am

Meanwhile the 'product' provider keeps all the dividends which are the major part of the FT100 return, but probably not mentioned or quantified?

Still fair enough, the insurance companies have massive overheads they have to pay for.

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Re: "Investment Trusts are risky" says Financial Advisor

#353807

Postby funduffer » November 5th, 2020, 4:14 pm

Coming back to the OP, my sister needs to invest for income, to bridge the gap between early retirement and state pension - about 10 years. She will need a withdrawal rate of about 8% for these 10 years, so I would expect her capital to run down somewhat over that period, but would hope there will be a good proportion of it left at 10 years.

It will be interesting to see what the IFA suggests, if it is not higher yielding investment trusts like CTY.

I assume there are higher yielding UT’s (like Woodford’s was!), but it will be interesting to see how much they cost and how reliable the income has been through the 2008 crash and more recent pandemic.

FD

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Re: "Investment Trusts are risky" says Financial Advisor

#353811

Postby Alaric » November 5th, 2020, 4:29 pm

scrumpyjack wrote:Meanwhile the 'product' provider keeps all the dividends which are the major part of the FT100 return, but probably not mentioned or quantified?


A secret behind these structured products is that they don't actually invest in shares, so there aren't any dividends. Rather they stay mostly in cash with what's left put into financial options that would match the complicated and convoluted promises.


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