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Home > Opinion > Dennis Hall

Trusts represent alternative to out-of-date with-profits

With-profits funds are well past their sell by date, but smoothing is something that investors appear to like.

By Dennis Hall | Published May 09, 2012 | Investments | comments

Since I mildly rebuked the investment trust sector for expecting the retail distribution review to level the investment playing field, they have been constantly knocking on my door.

In fact there is rarely a day goes by when I am not having a meeting with someone from the investment trust sector. And I have to admit I am enjoying it. No, really, it makes a change to talk to people that are not pushing product after product, fund after fund.

For one thing, I am learning stuff. For another, they seem keen to learn too. I cannot recall the number of times the Association of Investment Companies has tried to drive awareness up among IFAs (even way back when it was the AITC) but the two sides are probably as far apart as they ever have been. But the more I learn the more I think there is a case for them having a greater presence in client portfolios.

As strange as it may sound I believe that there are some trusts that could be serious alternatives to with profits funds. In my opinion with-profits funds are well past their sell by date, but the principle of smoothing is something that investors appear to like. If not then why are structured products flying off the shelves? They are adding some predictability or certainty in a changing world. I am not keen on with profits funds or structured products, but a significant number of people do like them.

But if they want smoothing, predictability and an element of certainty for some of their investment, why not investment trusts? There are particular attractions for clients looking for a steady and rising income stream. It would be more tax efficient too I wager. You see, there are a significant number of trusts with a long and unbroken track record of dividend payments. Some also have an impressive record of maintaining and even increasing dividends year on year – just the kind of income predictability that many clients are looking for.

If it can deliver on the income, and is meeting its dividend promise, is the day-to-day change in either the share price or the net asset value as important as we think it is? Is the fact that the price can suffer a discount really all that different to a market value adjustment? I do not mean the technicalities of discounts versus MVAs; I just mean the emotional journey the client takes with their money.

Anyway back to my meetings, they have been devoid of the usual pushing and shoving of fads and funds (how can you have fads if your fund is more than 100 years old?). Instead there have been some intellectual conversations about the pros and cons of closed-ended structures, and how to address problems that stem from a lack of understanding. I have been pleasantly surprised.

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