The Alternative to Offshore Unit Trusts

Investment trusts are funds that are traded as shares on the UK stock exchange. These trusts invest in various asset classes and shares listed on various exchanges around the world. The trusts are actively managed in line with fixed mandates and overseen by a board of directors.

Investment trusts can be considered as an alternative to unit trusts because their underlying charges are lower than those on actively-managed unit trusts. It is not uncommon to find investment trusts that charge less than 1% ongoing annual charge versus the 1.5% to 2% ongoing annual charge that a lot of unit trusts charge. A good actively-managed investment trust with a superior return profile is thus an enticing prospect at levels of ongoing annual charges below 1%.

Another advantage of this type of investment is that the fund manager does not have to worry about client redemptions forcing the fund manager to sell some investments to repay the investor. The fund manager can invest for the long term and stick to a disciplined investment process. If you are dissatisfied with the performance, you can simply sell the investment trust on the stock exchange. Your sale of the investment trust does not force the fund manager to sell the underlying investments in the trust.

Some interesting investment trusts that follow a largely developed markets stock picking mandate are Monks, Bankers and JP Morgan American Investment Trusts. These have five-year annualised returns in GBP of 19.3%, 11.7% and 14.9% respectively. They are also much older than most of the readers of this article! Monks investment trust has an 88-year history, Bankers Trust has been around since 1888. JP Morgan American Investment Trust has been in existence since 1881. The long-term nature of these trusts gives a level of comfort that they have a cycle-tested investment process.

There are also themed funds that focus on sectors like technology, biotech, emerging markets or private equity. These are suitable for high-risk investors and can be more expensive in comparison to investment trusts focused on developed markets only. Some good ones include JP Morgan India Investment Trust, Templeton Emerging Markets Investment Trust or International Biotechnology Trust. These trusts are of a more recent vintage.

Investment trusts do not come without risk. Some of them have a mandate that allows them to borrow money to back their investment calls. This gearing of the underlying portfolio can cause erosion of capital in a bear market if the trust was not judicious in the use of borrowed capital. Some trusts can also trade at discount or premium to their net asset value. The discount or premium can often be used as entry or exit points into the investment trust.

Investment trusts have a history of solid returns and can be deceptively simple, however it is advisable to consult with your financial advisor to pick the right one that fits your required return and risk capacity. There are hundreds of such instruments available in the UK alone. One must research and interrogate the investment trust prospectus.


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