Investment trusts must now produce standard fact sheets showing charges in pounds and pence, and potential performance in good and bad markets.
The purpose of the watchdogs, which have made them mandatory since the beginning of this year, was to give investors important information about how trusts work and to make it easier to find and compare them.
Below we take a look at what the Investment Trust’s “Key Information Documents” or KIDS provide to investors.
Do-It-Yourself Guide: What You Need to Know Before Buying an Investment Trust
We asked investment expert Adrian Lowcock to tell us which parts of the documents are most worth investigating and how to use them to research investment trusts.
Lowcock is currently Chief Investment Officer at Architas, an investment management company owned by AXA. He is expected to join investment broker Willis Owen as head of personal investments this summer.
The Edinburgh-based fund house has criticized the potential future performance figures it has to put on its investment trust KIDs.
We have previously looked at how to assess the more basic information sheets published by investment funds, known by the slightly different title of Key Investor Information Documents or KIIDS, and you can find our recently updated guide here.
What can you learn from an investment trust KID?
1) What is this product?
A KID will give general details of the purpose and strategy of the trust from the outset.
In the case of Scottish Mortgage, it is an “actively managed low-cost investment trust which invests in a reasonably well-diversified portfolio of assets”, the document states.
How to find the KID of an investment fund?
They are often hidden away in some obscure corner of the investment company’s website.
You can usually find them by putting together the trust name, key investor document and KID in a search engine.
“It aims to maximize long-term total return from investments primarily in stocks of companies around the world.
“Managers seek out strong, well-managed companies that offer the best potential opportunities for sustainable growth going forward and aim to outperform the FTSE All-World Index (in sterling terms) over a rolling 5 years.”
This section contains useful details about the trust’s high-level goals, says Lowcock.
“It does give a bit of information and flavor as to whether or not it might be right for you. It’s not enough to go ahead when making an investment decision, but maybe if it’s appropriate,” he notes.
There is also an attempt to explain “gearing” – borrowing to increase investments – but “it’s a bit of jargon”, he believes.
And although the purchase of the shares of the trust at a premium or at a discount is mentioned, it is not explained. Learn about this important aspect of investing through trusts below and go here for more explanation.
“Baillie didn’t try to sugarcoat it. They try to be transparent and do the drill that they are required to do,” says Lowcock.
What will make a lot of money in the next 10 years?
Tom Slater, co-manager of Scottish Mortgage Investment Trust, explained his long-term growth strategy in an interview with This is Money here.
“There’s an awful lot of information they need to get in this part – you can’t buy shares directly, trading hours, discounts and premiums, bid spread and liquidation process.
“It comes across as a very technical document, to be frank. If you read the first section, it is very focused on regulations and requirements.
2) What are the risks and what could I get in return?
All KIDs will offer a risk rating between 1 and 7 based on the past volatility of a trust’s share price, although experts dispute the usefulness of this type of metric when assessing risk. future.
Lowcock thinks there are problems with using volatility to calculate risk, and giving Scottish Mortgage a ‘4’ on the scale here makes no sense.
“Volatility is the measure of an asset’s movement in the market. Last year was not a volatile year. That’s not to say it wasn’t a risky year. Volatility is market movement, not market risk,” he says.
Source: Baillie Gifford
The KIDs also give detailed figures on the potential return on a £10,000 investment under stress, adverse, moderate and favorable scenarios.
Baillie expressed concern that KIDs were misleading investors because of this, and Lowcock agrees that past performance is no guarantee for the future and tells you nothing about what will happen next. ‘to come up.
He adds regarding the way it’s displayed here: “It’s a lot of numbers. It is a difficult chart to read. If you are an experienced investor, no problem. You will understand these numbers. If you are a novice, it is difficult to grasp this explanation.
Source: Baillie Gifford
3) What happens if Baillie Gifford is unable to pay?
This explains what would happen if Baillie collapsed and how that would differ from a default in the trust or one of its underlying holdings.
4) What are the fees?
This gives the cost scenarios if you cash in on a £10,000 investment after one year, three or five years, in pounds and pence.
It also cites the impact of different fees on your investment returns each year, in percentage terms.
Source: Baillie Gifford
5) How long should I keep it and can I withdraw money sooner?
Baillie mentions the industry rule of thumb that you should invest for at least five years, “for guidance only.”
“Investments in stocks should be considered long-term investments, but there is no minimum (or maximum) holding period for stocks. Shares can be sold when the markets in which they are traded are open,” he says.
6) How can I complain?
This gives standard complaint and contact information.
7) Other relevant information
This is the “any other business” section of a KID.
Baillie chose to reiterate the warnings he has already given in the “What are the risks and what could I get in return” section regarding his future performance scenarios based on past evidence.
These potential performance numbers are the aspect of KIDS that the trust’s director and board, as well as Baillie himself, have expressed concern about.
“They’re clearly concerned about that, so they’ve underlined that again,” Lowcock notes. ‘It is conscientious, and suggests concern. They also say that performance is not a guide for the future. It’s something that they thought they were re-emphasizing.
How do investment trusts work and what is net asset value?
Investment trusts are listed companies whose shares are traded on an exchange.
They invest in the shares of other companies and are known as firmmeaning that the number of shares or units into which the trust’s portfolio is divided is limited – unlike unit trusts or open-ended investment companies (OEICs) where investors’ money is put into common to invest in stocks, bonds or other funds.
In an investment trust, investors can buy or sell stocks join or leave the fund, but new funds outside of this pool cannot be raised without formally issuing new shares.
Investment funds can be riskier than mutual funds/OEICs because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value.
NAV is calculated by dividing the total value of assets (what he owns) minus liabilities (what he owes) by the amount of shares in existence.
The price of a trust may fall below the total value of its holdings if it is unpopular and people do not want to invest but want to sell. This lowers demand and raises the supply of his units for sale.
This gives new investors the opportunity to buy at a discountbut means that existing investors’ holdings are worth less than they should be.
An investment trust trading at a discount to net asset value may be considered cheap because the shares cost less than its overall value – although there may be good reasons for this, such as pessimism justified by investors as to its prospects.
When a trust trades at a premium to net asset value, it is more expensive than its net worth.
Investment trusts tend to be a cheaper option than funds, with no upfront costs and lower annual fees. However, their purchase incurs stock trading fees. A good DIY investment platform will reduce them.