Interactive Investor

Ian Cowie: why now isn’t the time to sell investment trusts

Our columnist says wide discounts shouldn’t be feared, but seen as an opportunity for long-term investors to follow Warren Buffett’s idea of being ‘greedy when others are fearful’.

7th March 2024 09:20

Ian Cowie from interactive investor

How much do financial advisers really add to their clients’ investment returns?

That’s a question so sensitive that some professional intermediaries might regard it as bad taste for this DIY investor to even raise the issue. Doing so seems to be regarded as an existential threat by some - who used to rely on commission paid by unit trusts, before that practice and the advice bias it caused - was banned a decade ago.

Since then, more intermediaries are recommending investment trusts and standards have improved substantially.

Now new research suggests some financial intermediaries are still most comfortable following the herd, recommending their clients buy at the top when investment companies are expensive and sell at the bottom when bargains are there to be had. For example, since shares in the average investment trust slipped to trade at double-digit discounts to net asset values (NAVs) in 2023, sales via intermediaries have collapsed by 28% below their level a year before.

To be precise, professional intermediaries’ clients bought a total of £948 million investment trust shares in 2023, compared to £1.3 billion one year earlier, according to the Association of Investment Companies (AIC). Net demand, or stripping shares sold out of those bought via adviser platforms in 2023, was negative for the first time since records began in 2011. So sales of investment trust shares exceeded purchases by £53 million during 2023, compared to a positive inflow of £474 million one year earlier.

Before your eyes glaze over, let me explain why this matters. Entry points are important for equity investors because buying low is often - although not always - the first step towards selling high and making a profit.

For example, if you had invested £1,000 in the average investment trust at the end of December 2008, shortly after Lehman Brothers went bust in the global financial crisis, when the average discount was 18%, your investment would have been worth £1,557 after three years or £2,201 after five years, according to independent statisticians Morningstar. In other words, brave buyers were rewarded by subsequent returns.

However, if you had invested £1,000 in June 2017, and the average discount was only 3%, you would have only made £1,127 over three years or £1,344 over five years. Following the herd on that occasion led to modest to meagre returns.

No wonder the most famous investor on this planet, Warren Buffett, recommends that stock market investors should “be fearful when others are greedy and greedy when others are fearful”.

That remains easier said than done, as the sales statistics demonstrate.

To be fair to financial intermediaries, much of the problem can be attributed to investor psychology; it is much easier to be greedy when everyone else is also being greedy.

Annabel Brodie-Smith, director general of the AIC, observed: “We all know we should buy when markets are down, but it can be hard to do in practice because our instincts are likely to hold us back.

“Nevertheless, buying on dips can be particularly rewarding with investment trusts because discounts tend to widen as investors become more fearful – leading to bumper returns when those discounts narrow again.

“Those who have waited, and invested in investment trusts in good market conditions, have had positive returns but have missed out on the double whammy of rising markets and narrowing discounts.”

Of course, the past is not necessarily a guide to what will happen in future - and the risk of investment trust discounts widening is one good reason some financial advisers still prefer to shun them. That risk is absent from unit trusts, where unit prices are set by mathematical calculation, instead of investment trust share prices being driven by demand interacting with supply on the stock market.

For example, with technology shares hitting stratospheric valuations, it is remarkable that the £4.1 billion investment trust Polar Capital Technology Ord (LSE:PCT) still trades at a 10% discount to its NAV despite its top three holdings being Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA) and Apple Inc (NASDAQ:AAPL).

Even more eye-stretching discounts are available elsewhere, such as Canadian General Investments Ord GBP (LSE:CGI), where NVIDIA Corp (NASDAQ:NVDA) is the top holding and Apple is not far behind, but this trust’s shares are priced 40% below their NAV. Both CGI and PCT look cheap but might yet get cheaper.

DIY investors have to learn to live with these complexities and, when things go wrong, face the fool responsible in the mirror each morning. Professional financial intermediaries have an important role to play in helping many investors cope with the stress of stock markets.

Rising numbers of intermediaries have an open mind about the pros and cons of funds and investment trusts. More than 1,700 wealth managers were active buyers of investment trusts last year, double the number of professional intermediary buyers a decade ago. So, despite last year's disappointing sales figures, some financial advisers are clearly keen to give their clients access to improved investment returns from the whole of the pooled funds market.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI), Microsoft (MSFT) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.