Investment Trusts

089 | Understanding Investment Trusts

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Tutor:

  • Melissa Gallagher, Head of Investment Trusts, Allianz Global Investors
  • Nick Britton, Head of Training, AIC
  • Doug Brodie, Managing Director, Master Adviser

Learning outcomes:

  1. How revenue reserves allow investment trusts to smooth income payments to investors
  2. How a fixed pool of assets allow managers to take a longer term view
  3. The respective roles of a board and the fund manager on an investment trust

Channel

Investment Trusts
Learning outcomes: 1. How revenue reserves allow investment trusts to smooth income payments to investors 2. How a fixed pool of assets allow managers to take a longer term view 3. The respective roles of a board and the fund manager on an investment trust PRESENTER: Well, Melissa Gallagher, how broad is the investment trust or investment companies’ universe? MELISSA GALLAGHER: In my opinion, it’s very broad. And it’s quite good to see it as a shop front. For example on one side you have mainstream equities such as Brunner Investment Trust, which invests in global equities, or Merchants, which is a UK equity income trust. In another area, you have specialist funds such as biotechnology, biotech, technology funds, healthcare and commodities, and in another area you have the alternative section, which has grown very recently, and that’s infrastructure, debt, equity and asset-backed funds. PRESENTER: So quite a range there. And are these funds or companies all on shore Nick Brittain? NICK BRITTAIN: No, about a third of our members are, as the AIC are actually offshore. So typically they’re in Guernsey or Jersey, those are the main locations, but their shares are listed on the London Stock Exchange. And so shareholders enjoy the same rights and protections as they do as if they invested in a UK-domiciled investment trust. PRESENTER: So to all intents and purposes they’re the same as, or very similar to onshore. NICK BRITTAIN: From an investor’s point of view there is very little to choose between them. But historically some companies prefer to be domiciled in Guernsey and Jersey. If they were investing in assets such as property or debt it was more tax efficient to do that. These days that isn’t so much the case because we have things like the REIT regime for example that makes it tax efficient to be UK domiciled and invest in property. But that was historically the reason a lot did choose to be domiciled there. PRESENTER: And Doug Brodie, as an adviser, it’s a very broad universe you can pick from, do you tend to stick in the mainstream area as an adviser, or out in the more esoteric parts of the market? DOUG BRODIE: It’s very much around the main UK equity or international equity sectors, because that tends to match most of the needs of UK-based investors. For an adviser, it’s important to recognise the investment trust industry grew up from its start in 1868 with Foreign & Colonial as the very first mutual fund on the planet. It grew up essentially for institutional pension fund. So there’s a lot of, there’s a goodly number of very esoteric or specialist funds there, but they don’t normally fall into the remit of a UK adviser. PRESENTER: And is there a particular advantage? I mean you mentioned things like F&C Investment Trust history, it’s over 100 years old, is that an advantage just knowing it’s got a very long track record? DOUG BRODIE: Yes, it is. The other core difference between a unit trust, which most advisers will normally use, and the investment trust, the investment trust has two sets of controllers. One is the investment manager, but the second is the board of directors, and the board of directors can make decisions on the underlying trust in terms of the dividend that’s paid out. That’s controlled not by the investment manager but it’s controlled by the board of directors. And the board of directors, they continually change. So it’s not as though you get, with a unit trust you’ve got the investment manager who’s in there for life because they own that unit trust; with an investment trust the fund manager does not own the investment trust. So you’ve got the additional layer of due diligence, and you could call that due diligence investor protection. PRESENTER: Well given that, Melissa, as a representative of fund managers, why would you want investment trusts on your books? MELISSA GALLAGHER: Well we’ve been managing investment trusts since actually when Merchants was launched back in 1889, and it was actually launched at the time to invest in railroad expansion in the US. And they’re brilliant vehicles. Allianz Global Investors is very supportive of its investment trust business. And we believe in them as a very pure good vehicle for underlying investors because of the transparency of those particular funds. And we work very closely with the boards of directors and the investment trust investors. And they’ve managed to evolve over time. So as I said Merchants started off as investing in railroads. It’s evolved over time and is now investing in UK equity incomes with a 5% yield. So we believe that there are actual products which investors want, and are still relevant today, which is why Allianz Global Investors is very supportive of them. PRESENTER: So one of the things with investment trusts is they have this ability to evolve to suit the needs of the audience over the long term. MELISSA GALLAGHER: Absolutely. They do definitely. PRESENTER: And Nick, are there any particular areas where investment trusts don’t work or haven’t worked so well? In the open space we hear a lot about say index tracking, but there’s not a lot of index tracking investment trusts. NICK BRITTAIN: No, there are none in fact anymore. There used to be one but no longer. I think the reason for that is quite obvious, is because if you want to track an index then you don’t want to have the element of discount premium volatility, which means you’re going to track the index less effectively. So I think that is the reason that investment trusts don’t really cover that area. The other area where there aren’t an awful lot of investment trusts is mainstream corporate bonds. But we do have quite a diverse debt sector mainly focusing on more illiquid kind of debt, peer to peer loans, convertibles, asset-backed securities and things like that. But we don’t do an awful lot of mainstream corporate bonds. PRESENTER: And Doug, another area where certainly in the open-ended world there’s a lot of talk at the moment is around so called multi asset, multimanager products. Again is there a lot of that in the investment trust space? DOUG BRODIE: Not a lot, but there is a growing discussion in the sector over whether they should be doing that. One probably thinks that it’s a little bit faddish. One of the things you will see in investment trusts is they are equities and some debt, but they’ll always have cash, and that’s called gearing. So they’re using cash as an asset within. Most of the investment trusts, the long-term investment trusts have been used for institutional investors. So it hasn’t been the remit of the adviser or the private investor to take large positions in investment trusts in previous years, but it always would be the institutional pension funds and pension fund managers. As such they would use, and they still do, an equity based investment trust to produce the equity returns when they want to do their fixed income. This is one of the reasons, Nick just touched on you don’t get the fixed income investment trusts so much is because if an institutional pension fund manager wants to take a position he’ll go and buy it directly off the market, he doesn’t need to have it wrapped, and he can, in doing it that way you can match your liabilities to the income produced by the fixed income. PRESENTER: And Nick, just picking up on that point, are there many institutional investors of this old style, the original insurance companies still in the industry, because there’s a lot of direct investors these days? NICK BRITTAIN: Yes, they’re certainly still in the industry, but I think where we’ve seen the real growth in the last few years is in retail investors and in platforms in particular. So if you look at a lot of the share registers of investment trusts you’ll see names like Hargreaves Lansdown very high up, and that’s this whole army of private investors actually that love investment trusts and are very passionate about them. And the other area which is coming from a much lower base but where we have seen growth is in actual advised clients using investment trusts. So we’ve seen a threefold increase for example since RDR in purchases of investment trusts on adviser platforms. PRESENTER: But as you said it’s a, but that’s growth off a much smaller base. Why the delay between the two groups? NICK BRITTAIN: Well I think historically advisers got paid commission for recommending unit trusts and OIKs but didn’t for investment trusts. Since RDR that’s no longer an issue, but there’s still a historical preference or tilt towards open-ended funds from advisers. But clearly as we see from Doug not all advisers, and some advisers have been using investment trusts long before RDR. But a whole lot more advisers are actually just starting to discover them now. And I think one of the reasons for that is the income advantages of investment trusts, and the fact that they can reserve income to provide a smoother growth in dividends over time. They can use things like gearing or illiquid assets to pay a higher yield, and those are the kind of things that are much in demand now. PRESENTER: Well I want to come to that in a second in a bit more detail maybe, but just before we do picking up on that point about platforms. Melissa, how easy is it to get investment trusts onto platforms, because that’s where advisers do a lot of their investment selection for clients full stop? MELISSA GALLAGHER: Yes, I mean there have been a number of platforms that we work closely with, for example AJ Bell, we’re starting to work a lot more with Interactive Investor for example. So you have two types: you obviously have the execution only side and then you have the adviser side. There’s more of the larger platforms which are coming onboard and taking investment trusts onboard. For example Fidelity recently took them on. So it’s very much a case of working with these platforms to make sure that they are including investment trusts as part of their overall offering. PRESENTER: And Doug, for you is it an issue for you that perhaps investment trusts aren’t as available on the mainstream platforms for advisers? DOUG BRODIE: It is an issue for the industry, and we selected our core platforms on the basis of who would not restrict our investment selection, because otherwise you’ve got a platform controlling the investment that’s going to be recommended to the client. So yeah, platforms are very important. And to us a platform should be completely agnostic about the assets they hold. If they’re permissible and they’re regulated they should be permitted. PRESENTER: Very quickly one group of clients we’ve not mentioned is VCTs, are they the same as investment trusts or something a bit different? NICK BRITTAIN: No, we’ll get in trouble from our tax expert for saying that. No, they’re not really investment trusts. But they are investment companies. And the thing they have in common with investment trusts is the closed-ended structure and the listing on the London Stock Exchange. So they have a limited number of shares. Now VCTs do, they’re a lot more active than the average investment trust in issuing new shares, and they do fund raising typically every year. But the thing is they don’t raise new money unless it’s in the interests of shareholders. And that’s the important thing about the closed-ended structure and the board control that Doug mentioned. Is that they can’t actually do anything that’s not in the interests of the existing shareholders as opposed to any new shareholders. So if a VCT or an investment trust, they’re both governed by the listing rules. So if they raise more money it’s because shareholders have approved that. PRESENTER: So its existing shareholders always get put first would be a crucial rule. NICK BRITTAIN: Yes, but not just put first, but they’re the only thing that should be considered by the board. PRESENTER: But VCTs can be members of the AIC, if you go onto your website you will see them there as members. NICK BRITTAIN: Yes, so a few years ago the AIC expanded its remit to cover VCTs because of the many similarities with investment trusts really. The closed nature, the stock market listing, board of directors and so on. But clearly they are a different beast in that they have these tax incentives attached to them, and they have restrictions on what they can invest in. PRESENTER: Well I wanted to pick up on something that Nick mentioned a little earlier, which is income. What is it that makes investment trusts particularly attractive for equity income? MELISSA GALLAGHER: Yes, one of the features that investment trusts has is that it’s got the 15% revenue reserve. And what that means is that it can hold back up to 15% of its revenue each year, unlike an open-ended fund, an OEIC, which has to distribute all its revenue, all its income to investors. So there may well be at times when the underlying stocks may not pay out a dividend. This revenue reserve enables the board to dip into it to be able to smooth out payments, dividend payments over time. So for example Merchants Trust has 34 years dividend growth, and there are times during that period when the board has dipped into that revenue reserve pot to make sure that the dividend payment made to shareholders has increased over that period. PRESENTER: But Doug, I suppose the cynic would say the other side of that is isn’t there a danger that investment companies are so keen to keep that growing dividend going they might do something to the detriment of the shareholders? DOUG BRODIE: Yes, woe betide the board of directors who after 49 years of rolling dividend increases decides to cut it. The lovely thing for an adviser working in the investment trust area is the transparency. Because the investment trusts are listed they have to publish their accounts. And you can either go onto the London Stock Exchange or go into Companies House and dig out all that information. What you want to have, what an adviser needs is an investment manager or the board of directors who are going to be reliable and not misleading, because we need to then pass that message, the investment message back along to our clients. There are times when things don’t go to plan. That just happens. Anyone expecting that shouldn’t be working in the investment world. When that happens we want to be able to tell the client. We have removed an investment trust from our research box because the chairman of the board of directors said in our office he would, in terms of a dividend cut, not on my watch. Well he might need to do that. When you go and look at the accounts, Melissa mentioned the revenue reserve. It’s great, go and look at the balance sheet and it shows you what sits in there. So our research involves going through the accounts of investment trusts, a relatively dry subject but to look at how much money they’ve got put away. Because that can tell you if they’ve got no reserves they’ve got nothing to fall back on in a lean year. PRESENTER: What happened in a crunch period, say 2007, 2009, 2010, when the world was going through a very tough time? On the whole the investment trusts you had for your clients, did they? DOUG BRODIE: They sailed all the way through. As I said City of London Investment Trust has not only paid its dividend but increased its dividend every year for the last 50 years. And there’s a whole swathe of their competitors sitting just underneath that. And within five years’ time a 50-year track record will be [unclear 16:14]. But we look at, with the income it’s not about the highest income. But the adviser can chop and choose what type of income he’s looking for from an investment trust. If you have young clients, for example, or a pension fund that is not going to be touched for 20 years, then you’re not so worried about the high level of income that’s being produced. What you are going to be concerned about is a consistently increasing income. And that’s ignoring the capital growth. But because of the transparency you can go through and have a quick look at all the investment trusts that sit in the sector, and you will get things just in the equity income fund sector. Someone like Merchants get an income current yield of just over 5%. Temple Bar at 3.1%. City’s currently at 3.9%. We just say well why would you do City at 3.9% rather than Merchants at 5%? Well City’s got a 50-year track record of increasing it, and that might be more valuable. The answer to that is actually you’d go and buy both. There’s another one, interesting one that sits down the side called Finsbury Growth and Income. Now Mr Train may only be. PRESENTER: Nick Train is the manager of that. DOUG BRODIE: He may be only producing 1.9% in yield, but he’s wiped the floor and capital growth with everyone else in the sector and over the last five or so years 126% return. So you’ve got to look at the different constituents. And that’s lovely because that’s what advisers actually do. The nice thing about investment trusts is, I think in our research we demonstrated there are more unit classes of Legal & General’s index unit trusts than there are total share classes of all the investment trusts. So it’s nice and narrow, you’re not getting confused. And when the client buys that investment trust there’s only that one share class. There’s not other people who’ve done backdoor deals and got slightly cheaper options on it, there is one price, and that price in general is always cheaper than the unit trust version. PRESENTER: Well that’s true at the moment, but I can remember the splits situation. So I mean it’s not a case that investment trusts haven’t always had a bit of a range of share classes. DOUG BRODIE: Indeed, and I am generalising. There are C class issues and there are ostensibly private issues that get thrown out. You mention splits. Splits are not mainstream. They weren’t mainstream, they’re not mainstream now. They’re use, they’re very specialist tools, and it’s one of those areas where if you don’t understand it that’s fine, just stay well away. PRESENTER: And very quickly on the dividends point. Nick, Doug was mentioned there trusts that have got track records that are 30, 40, 50 years long, how typical is that? NICK BRITTAIN: Well we have 20 investment trusts with at least a 20-year track record of increasing dividends every year. PRESENTER: Is that real terms or nominal terms? NICK BRITTAIN: Nominal terms but if you go back, if you look at the average fund in the AIC’s UK equity income sector, and you look at the last 20 years. So £100,000 portfolio invested in the average fund 20 years ago. You find that portfolio has grown its income every single year in cash terms, throughout the financial crisis as well, and the annualised rate of increase is 4½% over a period when RPI was 2.8%. So generally speaking yes, these trusts are trying to keep pace with inflation. PRESENTER: Doug, how does that compare then, that income record to open-ended funds, UK equity income sector? DOUG BRODIE: Well we research for our professional living. We just wouldn’t know where to go on the interest. We have tried to look at it; however the unit trust companies, they all compete against each other. With investment trusts it’s very easy because I can ring Nick and I can say right please can you go and ask this question of the elves you’ve got running your library, and then half an hour later bingo, all the info comes back. Or if I want to have dividend histories for an Allianz investment trust going back 50 years, again pick up the phone to Melissa, and then half an hour later I get all the information. The clarity and transparency of the information, it is an embarrassment to the open-ended market. PRESENTER: Moving on from that, we talked a little bit about the income reserves. Melissa, I want to move on to the fact it’s a closed end nature of investment trusts, how does that help managers? When might that be a disadvantage? MELISSA GALLAGHER: Well it helps managers in terms of it’s a fixed pool of assets. So that means that the manager can invest over the longer term knowing that there are not going to be any redemptions or inflows like there may well be on open-ended funds. So it ties up the manager’s investment objectives and timeline with those of the actual underlying investors as well. PRESENTER: But as a product provider does that mean actually when investors are putting lots of money into the market you kind of prefer open-ended funds, because that’s an asset pool you can grow. MELISSA GALLAGHER: You can grow investment trusts. Just because it’s a fixed number of share in issue doesn’t mean that you can’t grow it. You can issue up to 10% of your share capital each year. If there’s demand for more shares, then they can do a C share. I mean last year about £5.6bn assets were raised in both the secondary and the primary market within the investment company sector. PRESENTER: But if fund managers can raise more money, and also we see share buybacks, doesn’t that counter the original argument that investment trust managers have got a fixed pool of assets and know exactly what they’ve got to play with? MELISSA GALLAGHER: Well they do have a fixed pool of assets. But, and as I said they can raise assets, additional assets if there’s demand to do so, either by the 10% share capital or doing a C share issue. One of the great things about investment trusts is the liquidity side of things. So investors can buy and sell their shares on a daily basis through the stock market, and that provides investors knowing that with the comfort that they can buy and sell those shares whenever they want to. Now obviously that then leads onto the shares can trade at a premium to net asset value, or at discount to net asset value. So there is a quirk of investment trusts which you don't get with open-ended funds, which investors of investment trusts have to understand. PRESENTER: Well just picking up on that then Doug, obviously the share price and the NAV can be different on an investment trust, how does that effect the types of trust you buy for clients, and when you buy them? Or should you just ignore where the discount on premium is? DOUG BRODIE: We try and ignore it because the premiums and the discounts are either tactical items, i.e. they come on and off because a fund goes red hot for example, and there’s too much money chasing the shares, or it’s a structural item, and there’s quite a few that simply sit on a fairly large discount, except for our friend Mr Train who can’t shake off his premium, a fairly large discount and that’s virtually a perpetual discount. It depends from an adviser’s perspective what you’re buying it for. If you’re buying it for the income you are going to see variables in the underlying capital value. The only caveat that we have printed in bold in our office is we cannot buy at large premiums, because in general all premiums will unwind and fairly quickly. PRESENTER: Well, Nick, I suppose one of the other characteristics of investment trusts is gearing, ability to borrow money and put it into the market. Any evidence that fund managers that are good at gearing and that it’s helped produce higher returns than ungeared managers? NICK BRITTAIN: Well I think the evidence is just, part of the evidence has to be the outperformance of investment companies versus equivalent open-ended funds over periods of five to 10 years, and I think a lot of studies have shown that that outperformance is there. If you look at funds that have got the same manager, for example open-ended fund, an investment trust run by the same manager with the same strategy and mandate. You’ll see typically over a period of five to 10 years, you’ll see the investment trust outperform. Gearing is, I don’t think is the only reason for that, and I think this thing we’ve been talking about, fund flows and the unpredictability of fund flows with open-ended funds is another key reason. But gearing clearly has got to be one reason that if markets go up of course, if markets go down it’s going to hurt you, but if markets go up as they generally do over time, then gearing is going to be a tailwind. PRESENTER: Has the extra risk of borrowing and putting it in the markets, is that justified by the returns that have come out? NICK BRITTAIN: Well I think that’s got to be up to every investor. But I think if, different investment trusts have got different strategies towards gearing, and not all of them use gearing. In fact just over half of investment trusts believe it or not have got zero gearing at the moment. And about a further quarter have got gearing in a thing called digits, and it’s only about another quarter that have got gearing in double digits. So investment trusts are far less geared than a lot of people generally imagine. But clearly the amount of gearing can change over time. And that’s why if you look on the AIC’s website you’ll find a figure called a gearing range. And a gearing range will be for example zero to 25, and that will give you an indication of the board’s intentions with regard to gearing the trust in the future. PRESENTER: So it’s up to the board how much money is borrowed, not the fund manager. NICK BRITTAIN: Setting the framework is up to the board. The day-to-day management of the gearing will obviously involve the fund manager. But the board puts a framework in place and guidelines in place. PRESENTER: Melissa, we’re in a period now where interest rates are really incredibly low. But if you were a fund manager or a trust that borrowed quite a lot of money at a much higher rate of interest say 15 years ago, and at the time it looked like a great deal, doesn’t that form an incredible headwind to performance over? MELISSA GALLAGHER: It does. PRESENTER: The next few years. MELISSA GALLAGHER: It does. There are a number of trusts who took out long term debentures, which is a form of gearing, say 25, even 30 years ago, and which are starting to be paid off now. And the coupon on those, so the interest rate or the coupon that they’ve been paid on those is 11 or 12% which is incredibly high compared to around 3% these days. So it has had an effect on performance over time for a number of trusts. But I think as we’re coming to the end of that phase of expensive debentures, and as they roll off, a lot of the trusts these days are taking out debt over a longer term at very low rates at around 3 or 4%. PRESENTER: And Nick mentioned the range of gearing, I mean let’s use Allianz Global Investors as an example of this. What sort of levels of gearing do your boards feel comfortable having in place? MELISSA GALLAGHER: Well for example Allianz Technology Trust doesn’t have any gearing at all; whilst the Merchants Trust and Brunner Investment Trust, they both have gearing. Merchants is geared up to 20%, currently geared at 20%, and the manager is fully invested, so that gearing level remains at around 20%. Brunner meanwhile, the manager uses the gearing on a tactical basis, so puts the money into and takes it out of the market when she feels the timing is right. And the gearing for that fund is around 7%. PRESENTER: And the technology, what’s the rationale there? Is it just that technology’s high enough risk and reward already without? MELISSA GALLAGHER: Yes. PRESENTER: Borrowings on top. MELISSA GALLAGHER: Yes absolutely. PRESENTER: And Nick, just coming back to the structure of investment trusts. I mean there’s boards at the top of them, how good is the industry as a whole, if a trust’s not working at just winding itself up, getting rid of it, handing the money back? How effectively does that market operate? NICK BRITTAIN: Well we see examples of that all the time, because a trust reaches the end of its useful life. It’s not necessarily because it’s been a disaster, it could just be because it’s not relevant anymore, or there are other trusts out there that do a better job. And so in those circumstances the board may propose liquidation. There are also trusts that have regular continuation votes. And there’s a growing trend where every five years for example they’ll go to their shareholders and say do you want us to carry on with this or shall we just pack it in? And generally of course the shareholders say carry on, but it does give them an option to wind it up. And the logic behind that is that you can get the assets back at NAV. So if it is trading on a very wide discount the continuation vote is a way to make sure that doesn’t, isn’t perpetuated. PRESENTER: Doesn’t that make it more difficult though for the fund manager to invest for the very long term, or to invest in things that are illiquid if he or she has always got in the back of his mind that they might take all the money back in three or four years’ time? NICK BRITTAIN: Well if shareholders do vote to wind up the trust, clearly there’ll be a managed liquidation process. So depending on the liquidity of the underlying assets that could take anything between a few weeks to a few years. If it’s a private equity trust it could take years to wind it up. But the thing is then you do in theory get back the NAV minus the cost of doing the winding up. So I think boards are very aware now that they have to remain relevant. One of the things that we’ve seen is fee cuts and performance fees being scrapped on an awful lot of trusts, especially since RDR. So we’ve seen about a third of the industry actually reduce fees or change their fee structures since about 2011. And the reason for that is that clearly open-ended funds now you can buy them on a clean share basis, and in order to compete a lot of investment trusts have actually been making their prices even more competitive than they were before. PRESENTER: And just sticking with the board for one moment if I may Doug, how much time do you spend analysing who’s on the boards of trusts, and not just looking at the track record, the revenue reserves and the track record of the manager? DOUG BRODIE: We take account of it, and we meet members of the boards when we go and speak to the fund managers. Which for an adviser, it’s unusual that we get that amount of access. And that again is wonderful. It’s a completely different way of doing business. Just picking up on what Nick commented on on costs, an example would be if you look at Trojan Asset Management who do both closed and open-ended on their personal assets trust, the fee on that is about 60/65 basis points. On most of their open-ended it’s way over 1% per annum, which is a 53% higher charge. So they do do an effective job. Is it an old boys’ network? To an extent. Their job is to keep a steady hand on the tiller, and to provide experience. They’re not running the underlying investment management, but they need to have experience so they know what they’re doing. PRESENTER: Well just quickly I want to pick up on the old boys’ network element in a second if I may with Melissa. DOUG BRODIE: And girls. PRESENTER: But I suppose back on the issue of fees someone might say well there’s stamp duty payable when you buy investment trusts at 0.5%, there isn’t on open-ended funds. If you take that into account how good value do investment trusts look? DOUG BRODIE: Well it’s quite straightforward. So if you look at the question of stamp duty, I mean stamp duty underneath when you buy any equities it’s payable. So how is it paid when a unit trusts buys Vodafone shares? Do they not? You simple don’t see it. The great thing about… PRESENTER: Well hang on, some people would say you pay it twice. You pay to buy the investment trust and then when the investment trust buys something they pay it. DOUG BRODIE: There is an element of that. And having transparency is not a one-way ticket. Everything is, it’s like when the tide goes out you really can see who’s wearing swimming trunks and who’s not. And there is quite blunt parts of dealing with investment trusts. One of the more blunt areas is if you want to do a large trade for a client, and a large trade in an investment trust could be £20-25,000. You might get caught with liquidity, i.e. there may not be that volume of shares available to be bought. Or if you’re trying to sell you might find that actually on that particular day that afternoon there isn’t anyone that wants to buy it. The way you get round that is again brand spanking new way of working for an adviser, you do actually develop a relationship with the dealers of the platform that you’re trading with, or with the stockbrokers or with our good friends at Winterflood’s the font of all knowledge in investment trusts, aside from Nick obviously. And they will tell you what they think the market feels. So they’re working in your interests. If you compare that to the unit trust side, the phone number as an adviser that you get given for the unit trust is for one of their sales team. I’ve already made the decision where I’m going to invest money, you don’t need to put a salesman onto me; with the investment trusts they just don’t have those people. PRESENTER: All right, thank you for that. And just back to the board then Melissa, I mean how much effort goes into picking members of boards? Could you talk us through? I mean I know it’s the responsibility of the board of a trust to pick the board, but how is that? MELISSA GALLAGHER: I think in the past the house, the investment trust house used to have quite a lot of involvement in deciding who went onto the board. These days it’s very much led by the board and the chairman of that board. And there’s a number of head hunters in the industry who put out searches for investment trusts non-exec directors. And what is so good I think about the boards is that obviously a while ago they were very much an old boys’ network. But they have changed very much I think over the last, probably the last 10 years or so. And now you have a real range of diverse experience from finance, accounting, marketing, politics, journalism, asset management on those boards. And I think with the better corporate governance which is in place now, there is an expectation that those board members are only on the boards for about nine maybe ten years, and then they are moved off, and then they move on elsewhere. But ultimately the boards are there to represent the shareholders, all shareholders interests, and set the objectives for the manager, and make sure that the manager adheres to those objectives. PRESENTER: We are pretty much out of time. So I just want to get a final thought from everybody. If you’re an adviser and you’ve not really got involved with investment trusts until now, one reason from each of you as to why that adviser should think about it? Melissa, can I come to you first? MELISSA GALLAGHER: I think they’re very transparent. Because they’re listed companies, they have a board of directors who represent the shareholders’ interests, and they provide access to that manager, which you don’t get with open-ended funds. PRESENTER: Nick? NICK BRITTAIN: I’m going to give you three but quickly. The income advantages, ability to smooth dividends over time. The long term outperformance of investment trusts versus other collectives, and the ability to invest in illiquid or alternative assets. PRESENTER: You know you’re making Doug’s job harder now. NICK BRITTAIN: Well he can expand on any one of those. PRESENTER: Nick, thank you very much for that. Doug. DOUG BRODIE: Over the first 15 years of the millennium of the top performing equity income investment trusts, they grew their dividends at an annual average of 6.3% per annum versus inflation over the period of 2.8% per annum. What else would a client want? PRESENTER: We have to leave it there. Melissa Gallagher, Nick Britain, Doug Brodie, thank you all very much. MELISSA GALLAGHER: Thank you. NICK BRITTAIN: Thank you. DOUG BRODIE: Thank you.