Emma Wall: Hello and welcome to the Morningstar series, 'Ask the Expert.' I'm Emma Wall and here with me today is John Newlands, Head of Investment Companies Research for Brewin Dolphin.
John Newlands: Good morning, Emma.
Wall: Hi John. We are here today to talk about investment trusts. This is our Investment Trust Week and we are looking to go back to basics for people who are perhaps less familiar with closed-end funds. What are the benefits of investing in closed-end funds?
Newlands: Well, I have to say you've probably come to the right place because I'm number one enthusiast for this sector. There's a combination of technical reasons why you might wish to invest in them and there are some more subjective reasons, for example, the fact that it's a very sort of human setup. You can buy a share and just by doing that you can go to the AGM, you can meet the Board, you can meet the fund manager and I personally like that extra layer of comfort.
Wall: Then you said there are some technical reasons as well.
Newlands: Yes. The first and most important one is that investment trusts are called closed-end funds. So, the fund manager is given a pot of money to run. He or she can invest for the medium to long-term with that money without having to worry that they are going to have to sell something to give people their money back or to buy something else if you get new investors as a manager of another type of fund would have to do.
Wall: And this liquidity is really key, especially when investing less liquid assets, isn't it, such as property?
Newlands: That's correct. That's another reason why an investment trust might be structured in a particular area such as property or private equity. It would be extremely difficult to have a unit trust or an open-ended fund that could work in that area without the ability to, for instance you can't sell a building just because somebody wants to sell their shares.
Wall: There are some complexity layers to investment trusts that I think act as a slight barrier to entry for beginner investors. What would you say to that sector of investors?
Newlands: Well, I think just doing a little bit of extra homework will pay off in this case. After all, you're probably and many of us are going to be investing for the very long-term and it's just worth doing the extra – going the extra mile before you even start. There are some really excellent website out there, including your own, of course.
Go on to these sites, read some of the educational papers on there, if you will and just get a feel for it and then I would suggest that you start by investing in one of the large generalist funds which would give you global exposure without significant layers of risk which you would get from investing in a very specialist area.
Wall: And are there any things that we should be aware of before we start investing in investment trusts? You said that do a little bit of extra homework. Obviously, we have our own rating system here at Morningstar which will help people get an idea of who the best in sector are.
Newlands: Yes.
Wall: Is there anything else we should be aware of?
Newlands: Well, I'm probably going back onto my subjective points here, but I personally like the very experienced battle-hardened fund managers, not the youngest, who have been there and they've learnt as they've gone along and they have got a track record which you can examine and see how well they have done and they are still there and that's where I would start.
There are some brilliant young star managers of the future, but I wouldn't start there. They are much harder to identify and you might get someone who actually isn't getting it right.
Wall: And investment trusts, of course, have over a 100-year track record. I think there are about 20 funds that have been running for that amount of time and so they have really seen through market cycles.
Newlands: That's right. It's an unfortunate additional point that they are still not well-known by the man on the street and one of the reasons for that is they don't really spend a lot of money on marketing and advertising. The argument is that you've got a fixed number of shares in issue. So if you're encouraging one person to buy then by default someone else has got to sell. So, why spend money advertising your advantages which they undoubtedly have.
Wall: John, thank you very much.
Newlands: All right. Thanks Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
