Mr (Basildon and Billericay)
(Con):...Let me describe as clearly and succinctly as I
can what an investment trust is. An investment trust is like any
other public company, such as Marks & Spencer or Shell, but instead of managing clothes or oil,
it specialises in financial products or investments. Investors have
a wide range of investment trusts to choose from—more than
400—covering all areas of the investable world, if that is not a
contradiction in terms, ranging from the UK market to very esoteric
markets overseas, and specialist sectors within those markets. They
are very old and some of them are quite large—one or two are now
FTSE 100 companies, Scottish Mortgage being the prime example. They
are becoming increasingly popular in the favour of private
investors, who are increasingly recognising their ability to
outperform benchmarks and outperform their open-ended cousins, unit
trusts, over the long term.
The EU regulations we are looking to embody within UK law may
have a good intention but the problem is the execution. Many in
the industry believe that these key information documents are
grossly misleading on the assessment and comparison of risk,
grossly misleading on the projection of future returns, and
certainly misleading on the comparison with similarly mandated
sister funds within the unit trust industry. I suggest to the
Minister that that could make for a perfect storm if no
corrective action is taken. No wonder all three of the major
trade organisations that oversee this particular area—the
Investment Association, the Association of Investment Companies
and the Personal Investment Management and Financial Advice
Association—believe that these regulations should be scrapped or
reworked. I am pleased to see that the FCA has instigated a call
for evidence but I will later have questions for the Minister
about that call for evidence and the follow-through.
Perhaps one needs to make the simple point that investment
trusts, although they have a superior long-term track record, are
actually riskier because they are more volatile than their
open-ended cousins, unit trusts. When an investor puts money into
a unit trust, that adds to the pot. When an investor takes money
out, that detracts from the money that is managed in the pot.
There is a direct relationship between the net asset value of the
fund and the share price.
An investment trust is closed-ended. In other words, when one
buys an investment trust, as when one buys Marks & Spencer or
indeed Shell, one is not adding to their
portfolio, but buying shares in the market. There is a disconnect
between the net asset value and the share price. Therefore, that
makes for volatility by the share price, which is why investment
trusts are considered riskier than unit trusts over the short
term, but actually they perform better over the long term. That
is in part because as a company they can gear—as can all
companies, such as Shell and Marks & Spencer—but also
because they can take the long view, because they are not having
to worry about redemptions and money coming in and out...
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