Mixing ITs and OEICs - a good idea?

[iambic]

I'm interested in whether mixing Investment Trusts & OEICs in a portfolio is a good idea & if so, how people approach it. I've got a planned portfolio just made up of OEICs (apart from a REIT & small allocation to gold), but having read the Investment Trust Handbook, I'm very interested in investing in IT's as well.

Reading the portfolio posts on here though, it looks like people tend to have an entire diversified portfolio made up of just IT's or open-ended funds.

I'm trying to work out whether to have a core set of holdings in a diversified pot of OEICs, then have a separate set of IT's, or whether I should replace some of my passive fund selections with IT's which invest in the same asset class.

We're building up our holdings slowly, so there won't be issues with selling/trading charges etc. as it's all mainly theoretical at this stage, but I'm interested in people's thoughts.

Many thanks,
iambic

[Aminatidi]

I do.

I'll caveat that I've only been doing this for a little over a year, but I see it as a mix of does an IT do something I want, and, depending on platform, it can help with fees.

So for example I'm split across:

* Fundsmith (OEIC)
* Lindsell Train Global Equity (OEIC)
* Capital Gearing Trust (IT)
* Finsbury Growth Trust (IT)
* Troy Income & Growth Trust (IT)

I'd struggle to see why mixing could be considered a "bad" idea given how you've phrased the subject

[Alaric]

I'm interested in whether mixing Investment Trusts & OEICs in a portfolio is a good idea

If you want diversity of investments, you have to accept that the investment horizons of OEICs are constrained by the need to calculate and publish a daily price based on the underlying asset values. Also that if they are hit by a wave of selling, they have to be able to liquidate the underlying assets. ITs, being closed funds in principle, don't have these constraints and can therefore contain more exotic and less liquid assets.

The process of buying and selling OIECs is slightly different, but they can live alongside shares without creating issues. Be aware that some platforms will charge extra for holding OIECs. Against that, they may allow you to purchase them without charging a dealing commission.

[iambic]

I'm interested in whether mixing Investment Trusts & OEICs in a portfolio is a good idea

If you want diversity of investments, you have to accept that the investment horizons of OEICs are constrained by the need to calculate and publish a daily price based on the underlying asset values. Also that if they are hit by a wave of selling, they have to be able to liquidate the underlying assets. ITs, being closed funds in principle, don't have these constraints and can therefore contain more exotic and less liquid assets.

The process of buying and selling OIECs is slightly different, but they can live alongside shares without creating issues. Be aware that some platforms will charge extra for holding OIECs. Against that, they may allow you to purchase them without charging a dealing commission.

Thanks Alaric, despite having read up about IT's & thinking I've grasped a basic understanding of them, I've still been (erroneously) thinking it's a straight swap between, say, an OEIC that tracks Emerging Markets & an IT that invests in Emerging Markets. How they operate is obviously key though!

Back to me trying to understand the fundamentals I think

[Alaric]

I've still been (erroneously) thinking it's a straight swap between, say, an OEIC that tracks Emerging Markets & an IT that invests in Emerging Markets.

The need for a reliable daily valuation is likely to constrain an OIEC to only invest in companies quoted on a (reputable) stock exchange. IT's on the other hand only have to establish a Net Asset Value on a monthly basis and even there it's just for information.

As a general principle, OIECs can be index trackers or actively managed whilst ITs are invariably at least nominally active and ETFs trackers.

Fidelity Special Situations was/is a big name OEIC. When the same formula or similar was extended to China, the launched fund was an IT.

[tjh290633]

The basic difference is that OEICs are open-ended, whereas ITs are closed-circuit. However ITs can issue new shares and buy in old shares as a discount control mechanism.

You get some with the same management and objectives that run in parallel. Usually the IT does better than the OEIC.

Individual shares are likely to better in terms of cost, because you are the portfolio manager and do not charge for your services.

You haven't mentioned ETFs, some of which have the lowest costs available and can be traded in real time, unlike OEICs and other unit funds REITs are preferable to property funds, because of their lack of liquidity at times of deinvestment and withdrawal of funds by investors.

TJH

[Spet0789]

I don’t see any issue with mixing.

My preference is to own ITs as I think they are a better vehicle (the only suitable vehicle for illiquid assets) but I am happy to buy OEICS too.

One area where OEICS have an advantage is for small regular savings as usually there are no transaction costs to buy or sell. I sweep dividends into an OEIC and then periodically sell to buy ITs in bigger amounts.

[iambic]

You haven't mentioned ETFs, some of which have the lowest costs available and can be traded in real time, unlike OEICs and other unit funds REITs are preferable to property funds, because of their lack of liquidity at times of deinvestment and withdrawal of funds by investors.

TJH

Thanks TJH. I have got a couple of ETFs in my portfolio but reading about the benefits of IT's, I'm keen to include them. I've noticed that people seem to post about "baskets" of ITs on the forums though & wondered about whether there's a specific benefit to focusing solely on IT's, as opposed to including them in an OEIC/ETF type portfolio.

[iambic]

I don’t see any issue with mixing.

My preference is to own ITs as I think they are a better vehicle (the only suitable vehicle for illiquid assets) but I am happy to buy OEICS too.

One area where OEICS have an advantage is for small regular savings as usually there are no transaction costs to buy or sell. I sweep dividends into an OEIC and then periodically sell to buy ITs in bigger amounts.

That sounds like an interesting strategy. I get dividends paid from the ETFs in my account & because they're not enough to buy a whole share in an ETF, I put them into one of the accumulation funds, which I guess is kind of similar to your approach.

I have looked at transaction costs for IT#'s & Fidelity (who my S&S ISA is held with) charge £10 per trade, so I'll consider moving to a cheaper platform before buying I think.

[tjh290633]

As I recall, unit trusts had an initial charge of typically 5%, which led to the bid/offer price difference. Then OEICs were introduced with single pricing, but a separate initial charge was levied. Later an exit charge replaced the initial charge, but was only levied if you sold before a certain time had elapsed, probably 5 years.

I don't know what the current situation is, but obviously you never get something for nothing. Whether you pay a fee, a charge, or whatever, somebody takes a cut when you buy (or sell) something.

TJH

[Avantegarde]

I would recommend mixing ITs and OIECs/Unit trusts. You can, as I do, put money in cheap index trackers of your choice while putting the rest in IT's that you hope will give provide a better income or total return than the trackers. Simple.

[PrefInvestor]

Clearly many here are still advocates of mutual funds (OEICs and Unit Trusts). Personally i had a bad experience with them during the 2008 financial crisis and I swore that I would never put a penny in one ever again. My problem was that I had a bundle of accumulation funds, which of course pay you nothing in the way of dividends when things are going badly, which they certainly did. There are a few mutual funds which will pay you an income but not many and yields are pretty dismal. (BTW I have same problem with growth stocks and won’t invest in those either.)

Personally IMV mutual funds are just a mass of excessive charges many of which are just opaquely hidden in the price. Unit trusts being far the worst due to their often significant spreads . And to add insult to injury nowadays my broker charges 0.45% pa just to hold a mutual fund in your portfolio.

I am also not convinced by the active management concept and I think many mutual funds provide pretty mediocre performance in practice. Let’s face it Mr Woodford s funds arent doing too well these days are they. No doubt there are good performers, but grossly outnumbered by the duds IMV.

These days I don’t invest in anything unless it pays at least a 4.5% dividend (to live off in the hard times without touching the capital). Also I invest only in ITs and ETFs plus a small collection of single stocks. The ITs and ETFs I find provide an ideal low cost way of investing which provides the diversity of mutual funds, higher dividends, overseas exposure (if you want that) and they trade like shares (with none of the delays inherent with investing in funds).

No doubt there will be many here with contrary views. But one is driven by your own personal experiences and that is reflected in my investment approach.

ATB

Pref

[Dod101]

I would say to the OP that there is nothing wrong in principle in mixing the two types of collectives, but do understand that they are not the same type of vehicle.

In addition to some of the differences already mentioned, ITs can borrow (gear up) which will in good times (most of the time over a long enough timespan) provide a boost to the returns. Their charges are often lower than OEICs and a very important point ITs do not have to sell their underlying assets to meet redemptions, because they do not have any. Investors are buying a selling the shares in ITs , whereas with an OEIC, the investor who sells, triggers a sale in the underlying assets. Furthermore, an OEIC does not have the facility to 'smooth' income payments whereas ITs can and do.

In other words, as always, know what you are buying.

Dod

[iambic]

Thanks very much for everyone's comments, they've been really helpful to read through. It's also useful to understand the thinking behind why people choose the investments/portfolios that they've got.

I've been reading up about the differences between IT's & OEIC's & the way that IT's work does make them seem attractive so I'm keen to invest in them.

I've spent a fair bit of time trying to understand how to get a well diversified portfolio of passive tracker funds (including the odd ETF) put together, so I was wondering whether to slot in some IT's in place of some of the funds, or whether to hold the IT's completely separately & manage them like a mini standalone portfolio. I'm tempted not to do the latter anymore as it will no doubt increase the complexity & having read the comments here I'm reassured that mixing the vehicles doesn't sound like a crazy idea!