Part of the purpose of a share-tipping column such as Questor is to help investors who prefer not to entrust their money to a fund manager to construct a resilient and coherent portfolio.

The hope is that investors who use our tips will in time accumulate a basket of shares that offers diversification in terms of different industry sectors, degree of exposure to economic cycles and so on. (Some of Questor’s recommendations will continue  to be more in the nature of a “flutter” rather than a core or long-term holding, however.)

Other investors prefer to pay to leave the analysis and decision-making involved in portfolio construction to others and choose funds instead of shares. The drawbacks of funds, costs aside, are the need to keep up with changes in management, strategy, performance etc, as well as the potential for misalignment between the manager’s goals and your own.

Fund managers are often encouraged to accumulate assets purely to chase fee income, which can encourage short-term decision-making and eventual underperformance.

Investment trusts, which are, after all, a kind of hybrid between shares and funds, and pre-date by almost a century today’s popular unit-trust style funds, address some of these concerns.  

Trust managers are contracted by independent board members, many of whom have large positions in the company (the “skin in the game” we talked about yesterday). In addition, the structure of investment trusts does not lend itself to continuous accumulation of assets, so there is no incentive for managers to drum up new inflows to the detriment of long-term investors.

In fact, there is no external fund management firm whose interests compete with those of investors, because the trust’s board is accountable to shareholders and has a duty to appoint a manager who will do the best possible job of selecting investments for the lowest possible cost.  

A further attraction is the opportunity to invest in trusts at a discount to the value of their holdings. Discounts often arise not through a defect in the fund itself but as the result of short-term market sentiment. In time prices should correct to better reflect the company’s value.

It’s not uncommon for trusts that focus on the more volatile asset categories to trade at a discount and economic uncertainty tends to cause such discounts to widen, even when the managers have a good reputation and strong performance record.

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