Step-by-step guide to investing: seminar 13

A spectacular "Highland Fling" by the girls from Aberdeen Asset management was the highlight of the festive Christmas seminar, held as always in the Bonnie Prince Charlie function room, Tannochbrae Inn, Ullapool. Earlier, before tucking into the mince pies with a dram or two of whiskey, Merryn Somerset Webb of Moneyweek told us why it is that 68 per cent of Investment Trusts with a history going back over 30 years have beaten the stock market averages, whilst only a pathetic 28 per cent of Unit Trusts have done the same.

So what’s the secret? It is partly the “closed ended” structure. Investment trust managers can’t be forced to sell out of positions by investors looking to redeem shares in the same way that unit trust managers can, so they are more able to look to the long term.

It is partly down to the gearing (unlike unit trusts, investment trusts can borrow money to invest). Gearing boosts returns in rising markets and, as over the long-term the market generally does rise, it clearly contributes to out-performance.

Then there is the board of directors. Investment trusts are listed companies and, as such, have boards. These boards, charged with looking after the interests of shareholders, can – and do – shift between managers as they see fit.

Finally, there are fees. According to Lipper, the average investment trust has a total expense ratio (TER) of around 1.4 per cent and a third have TERs under 1 per cent. Contrast that with unit trust charges, which average well over 1.5 per cent and which have risen steadily over the past decade.

Overall, all this makes me a great fan of investment trusts. Current favourites? The Schroder Japan Growth Fund, which is trading at a discount of around 14 per cent to its net asset value (NAV) – making it a bargain if you think (as I do) that the Japanese market is underrated.

I’m also interested in Alliance Trust, which has just completed a buyback of its own shares. The trust has underperformed the market this year, thanks to its low-risk approach to investing (no bad thing) and is currently trading on a 17 per cent discount to its NAV. It also has a 41-year record of consecutive dividend increases. I suspect there is a value opportunity there.

So there we have it. Low fees, directors to scrutinise the manager, the ability to hold on to good stock when the markets are tumbling, and the ability to borrow money and enhance performance when the markets are rising.

Before wending our separate ways (and our thanks to Wee Willie Killicrankie the fourth of Perth, for giving Alastair Darling a lift to Edinburgh Airport in his helicopter) the seminar had an informal discussion about corporate bonds and fixed interest Investment Trusts. More of this to come!