Why choose ITs over OEICs?

[mrodent]

In a recent thread some people were singing the praises of JGGI (https://www.morningstar.co.uk/uk/report ... E0GBR00VWJ ).

I saw that this was an investment trust rather than an OEIC and already had some idea of the difference.

I wondered whether there might be a discussion on Lemon Fool about the relative merits. But both the questions which held out the prospect of enlightenment turned out to be duds: half the posters didn't seem to know the difference between ITs and OEICs (notably here: viewtopic.php?t=29890 ).

I'm aware that these are "closed" as opposed to "open" as in the O in OEIC, but what I mainly want to know is what the benefit of them is... are people who choose to buy ITs making this choice solely on the basis of past performance, or the strength of the team (I'm assuming all ITs are actively managed)?

Or are there other reasons? If there is indeed an existing discussion on Lemon Fool please point me to it and I'd mark this as a "duplicate".

[EthicsGradient]

I'm agnostic, but the arguments usually put forward for ITs are:
ongoing charges for active ITs tend to be smaller than the equivalent OEIC - this is sometimes attributed to the OEICs being actively marketed, which costs money
the legal structure as a plc gives the investors slightly more say in its fate
the typical discount to Net Asset Value means the dividend yield is slightly higher for the money invested
trading on an exchange means you know exactly what you'll buy and sell at, while an OIEC is set at a price after you place the order.

There are arguments in the other direction, of course.

[EthicsGradient]

A couple more that I've remembered:
ITs can borrow, which when done judiciously improves things
ITs can smooth out the dividend payout (eg keeping a bit in reserve during a good year), which for people who want a regular increasing income without having to sell units is good. OEICs have to pay out all the dividends they receive, when they get it.

[doug2500]

And another couple:

When there are similar OEICs and IT's whenever I've looked the long term TR is marginally higher for the IT. Lots of managers run both with the same team.
IT's are never forced sellers, OEIC's are often forced sellers to meet redemptions at the very worst time, making the problem of falling prices worse. An IT could be buying in the same scenario.

[Alaric]

.
IT's are never forced sellers, OEIC's are often forced sellers to meet redemptions at the very worst time, making the problem of falling prices worse. An IT could be buying in the same scenario.

For types of investment beyond regularly traded quoted bonds and equities, the OIEC structure can be unsuitable for this very reason.

Historically commission earning advisers didn't promote or recommend ITs. Some might say the lack of commission was a factor. Even after commission reforms, someone has it in for ITs as witnessed by the misleading cost disclosures mandated by the FCA.

[doug2500]

For some asset classes OEIC's are really, really unsuitable e.g. real estate. I mean it should never have been allowed, never mind thought of.

IT's are a must for illiquid assets, but just better all round anyway.

[DrFfybes]

Also when you buy or sell an IT it is instant. With an OEIC you never really know the price until the day after and it can take a few days to recieve the settlement.

Advantage is they tend to pay Divis in GBP so no ERI or foreign exchange costs to faff about with.

doug2500 wrote:
IT's are never forced sellers, OEIC's are often forced sellers to meet redemptions at the very worst time, making the problem of falling prices worse. An IT could be buying in the same scenario.

For types of investment beyond regularly traded quoted bonds and equities, the OIEC structure can be unsuitable for this very reason

Shame Neil Woodford didn't think about that.

Paul

[mrodent]

These are all very helpful answers, thanks.

Has anyone got anything good (anything at all? ) to say for OEICs? Or is this a triumph of commission-driven marketing over substance?

NB I don't quite get that (why they don't market ITs in the same way as OEICs, and earn similar commissions). But we're getting into quite nerdy territory here. Which doesn't mean that I'm not interested in hearing the answers if anyone knows and feels happy to impart their "nerdy" wisdom.

[Alaric]

NB I don't quite get that (why they don't market ITs in the same way as OEICs, and earn similar commissions).

Legally ITs are shares and you are buying them "second hand". You pay buying and selling commissions to the market maker.

[doug2500]

Has anyone got anything good (anything at all? ) to say for OEICs? Or is this a triumph of commission-driven marketing over substance?

Nope, can't think of an OEIC advantage except possibly when you have to sell at a discount to NAV. Otherwise I think you've nailed it.

[SalvorHardin]

Back in the dim and distant past when I worked for a fee charging IFA, the only advantage that Unit Trusts aka OEICs could realistically claim was that they always traded at NAV.

So investors got NAV when they sold a unit trust, whereas an IT would usually trade at discount. Funnily enough that you could buy assets at a discount to NAV with an IT didn't get a mention.

That's it. The real advantage was that advisers got a commission from unit trusts, usually 3% and possibly an annual "trailing" commission. They got nothing from investment trusts.

All too often I'd come across cases where the unit trust turned out to be a similar insurance company fund in an investment bond, which happily for the adviser paid 5% commission. Incentives matter, really matter, as we've seen recently with St. James Place and the huge charges levied on their clients' investments.

Charlie Munger's 1995 lecture "The Psychology of Human Misjudgement" is a superb insight into the power of incentives. It's online

[Urbandreamer]

These are all very helpful answers, thanks.

Has anyone got anything good (anything at all? ) to say for OEICs? Or is this a triumph of commission-driven marketing over substance? .

I'm not a huge fan of them and other than a Vanguard tracker don't own any.

HOWEVER: there are a huge amount more of them than IT's, which leads to greater choice. Also they are not always more expensive, in some cases they can be a bit cheaper.

Final thoughts. They are easier to grasp. I had a friend who quite simply could not get his head around the fact that there is a discount/premium with IT's. Hence he just wouldn't consider buying them, though he did get locked in a closed property OEIC at one point.

[EthicsGradient]

In OEIC's favour:
When you buy an IT, you pay 0.5% stamp duty.
OEIC managers might argue that when successful, they naturally get more capital to invest, whereas ITs have to raise capital in regulated ways, which may slow things down (or require paying interest on borrowed money)
The traded nature of ITs makes them more vulnerable to market sentiment, when a discount widens without an underlying cause in the assets. You might also get irrational exuberance and get a higher price, but it's more volatile.

[tjh290633]

Back in the dim and distant past when I worked for a fee charging IFA, the only advantage that Unit Trusts aka OEICs could realistically claim was that they always traded at NAV.

So investors got NAV when they sold a unit trust, whereas an IT would usually trade at discount. Funnily enough that you could buy assets at a discount to NAV with an IT didn't get a mention.

That's it. The real advantage was that advisers got a commission from unit trusts, usually 3% and possibly an annual "trailing" commission. They got nothing from investment trusts.

All too often I'd come across cases where the unit trust turned out to be a similar insurance company fund in an investment bond, which happily for the adviser paid 5% commission. Incentives matter, really matter, as we've seen recently with St. James Place and the huge charges levied on their clients' investments.

Charlie Munger's 1995 lecture "The Psychology of Human Misjudgement" is a superb insight into the power of incentives. It's online

Salvor, I think that you are on to something here. Those investment "bonds" were usually confined to a single unit fund, often rebadged by several insurers. Back in the day, when you got LAPR, the tax relief allowed you to pay the insurance element from the premium and still purchase more units that the amount paid. I got a lot of benefit from this from 1970 until LAPR was abolished for new policies later in the century. That effectively killed them off. I had a long running policy with the Pru where I paid £5 a month, yet was investing more than my premium. It matured in 1998, by which time the distributions far exceeded the premiums paid. Long before the Pru had seen the error of its ways, and had replaced that offer.

Agent's fees had a lot to do with it, of course.

TJH

[JohnW]

Are index tracking investment trusts available?

[Alaric]

Are index tracking investment trusts available?

I think someone attempted to do this, but the structure of ITs doesn't make it work very well. Essentially every time the IT moves to a discount or premium, you get tracking error.

[JohnW]

Thanks. I get that tracking error is generally considered a bad thing in a tracker, but a tracking error discount would be similar (?the same) as an IT priced at a discount which is considered by some as a good thing. Seems contradictory somehow.

[Alaric]

Thanks. I get that tracking error is generally considered a bad thing in a tracker, but a tracking error discount would be similar (?the same) as an IT priced at a discount which is considered by some as a good thing. Seems contradictory somehow.

The point is that the discount or premium can and will change over time. Whatever it changes by will make the IT capital performance different to the capital performance of the index. The same applies to ITs in general, but that's just regarded as part of the investment return and an additional risk when investing in ITs.

If looking to track an index directly, investors would now probably look at ETFs rather than OEICs.

[londoninvestor]

Are index tracking investment trusts available?

I think someone attempted to do this, but the structure of ITs doesn't make it work very well. Essentially every time the IT moves to a discount or premium, you get tracking error.

There was Edinburgh UK Tracker Trust, which was a FTSE All-Share tracker. It started in 1990, a decade before ETFs were really a thing in the UK and Europe. Like you say, I don't think anyone would try it now, given that ETFs are mainstream.

[JohnW]

Nope, can't think of an OEIC advantage except possibly when you have to sell at a discount to NAV.

And perhaps greater liquidity and the option to own index trackers.