When looking at funds of funds the choice is not just between fettered or unfettered but whether to ...
When looking at funds of funds the choice is not just between fettered or unfettered but whether to go for a vehicle that invests in open or closed-end funds.
The attraction of a fund of investment trusts is that the underlying holdings can often be bought at a discount to NAV and are often geared.
The downside is that discounts can always widen further and being geared in a falling market has a big negative impact on returns.
Nick Greenwood, head of investment trusts at Iimia, said the scope for returns in funds of investment trusts is much higher than for funds of unit trusts.
Few groups currently offer funds of investment trusts and Iimia is planning to launch three such vehicles soon.
At the moment, said Greenwood, there are quite wide discounts available for some investment trusts and there is money to be made out of market inefficiencies.
Alan Ray, investment trust analyst at Credit Lyonnais, said there are funds of investment trusts but they are few and far between. 'It can be hard to get the asset allocation, particularly for global portfolios,' he said. 'The choice of pure North American investment trusts, for example, is very limited.'
In Ray's view, running a fund of investment trusts is an intensive process, where liquidity is a problem.
'There have been some good performers such as Exeter Managed Growth and Scottish Value,' he says.
'It requires more trading skills and understanding the underlying market dynamics. It is not just a case of buying a portfolio of your favourite investment trusts.'
Ray said a manager is often forced to make up his portfolio partly of those investment trusts he likes the most, with the rest being those on large discounts.
'You may well have to buy investment trusts of lower quality where the price is right,' he said.
One recent multi-manager development in the investment trust industry has been the way Fidelity has set about running the assets of the Edinburgh Investment Trust, having taken on the management contract earlier this year.
The portfolio is effectively being run on a fettered manager of managers basis with four Fidelity managers running a portion of the £1.37bn trust, each using distinctive investment styles.
As yet it is not an approach that has been attempted on an unfettered basis and Greenwood thinks this is unlikely and does not believe long-established investment trusts such as Alliance or Foreign & Colonial would attempt to outsource parts of their portfolio to external management groups.
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