10 ProTips For Checking Out Investment Trusts

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Fund managers are warning investors to carry out thorough due diligence checks before placing any money with investment trusts.

A change in the way regulators police advisers and the way they give advice and a wider choice of investments from online platforms means investors should go through a mental checklist every time they shift money around.

Thorough due diligence is especially important for investors looking beyond managed funds and unit trusts to more complex products, like investment trusts.

Due diligence checklist

Fund manager AJ Bell reckons that one in five consumers investing through online platforms look at investment trusts, so has released a 10-point check to help with pre-investment due diligence:

  • Test the trust objective against investment goals – some specialise in income or growing wealth while others cover both bases

  • What is the trust’s investment style: growth, momentum, value or income

  • Check out the experience and past performance of the fund manager

  • Look at discount or premium to Net Asset Value

  • Find out about the fund’s ongoing fees and one-off costs

  • Understand the dividend policy

  • How does the trust manage debt

  • What’s the policy on derivatives

  • Look at the trust’s shareholding structure

  • Look beyond the fund manager at the skills and experience of the board and other senior managers

The firm’s research director Russ Mould said: “The market has a demand for investment companies as they offer easy access to a diverse range of investments and can keep cash liquid.

Sophisticated markets

“Old strategies of discount purchases and selling lower are pretty much played out and modern trading is much more sophisticated. Making sure the fund’s managers and policies are a good match to personal financial objectives is a must for any investor wanting to make the most of their money.

“It’s likely fund performance derives from the overall performance of the portfolio and from dividends, so researching the trusts and their money managers to make sure they are able to do the job is key for investors.”

Mould also explained that investment companies are trading near peak highs relative to the value of any underlying holdings with a discount to net asset value of 3.6%. This is slightly above the record low of 3.4% reported in December 2013 by the Association of Investment Companies.

This compares with a gap of 13% for the FTSE100 in December 1999 and 7% in June 2007.

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