Investment trusts: under the bonnet AIC Seminar Edinburgh 10 September 2015

Nick Britton Head of Training AIC

Do you currently use investment trusts?

Not so very different

Distinctive features of investment trusts

Closed-ended

Traded on exchange

Independent board

Can gear

Can invest in illiquid assets

Trade at premium or

discount

Return on £100 over last 20 years

Source: Morningstar (share price total return on £100 to end of July 2015)

£356

£517

Average unit trust/OEIC

Average investment trust

Discounts (and premiums)

Discounts explained

£10 £9 £9 £9

‘Discount’ is 10%

Premiums explained

£10 £11 £11 £11

‘Premium’ is 10%

A technical explanation… • Net asset value (NAV) = the value of the investment company’s

assets, minus any liabilities

• Net asset value per share = the NAV divided by the number of shares

Assets: investments + cash £500m Liabilities: debt (£20m) NAV £480m

No of shares in issue 240m NAV per share £2

Definition of premiums and discounts

Premium: share price is higher than NAV per share

Discount: share price is lower than NAV per share

Discounts and premiums in action

450

500

550

600

650

700

750

Aug

/12

Oct

/12

Dec

/12

Feb/

13

Apr

/13

Jun/

13

Aug

/13

Oct

/13

Dec

/13

Feb/

14

Apr

/14

Jun/

14

Aug

/14

Oct

/14

Dec

/14

Feb/

15

Apr

/15

Jun/

15

PriceNAV/share

Trading at a premium (price above NAV)

Trading at a discount (price below NAV)

Discounts and premiums in action (2)

5060708090

100110120130140150

Aug

/05

Feb/

06A

ug/0

6Fe

b/07

Aug

/07

Feb/

08A

ug/0

8Fe

b/09

Aug

/09

Feb/

10A

ug/1

0Fe

b/11

Aug

/11

Feb/

12A

ug/1

2Fe

b/13

Aug

/13

Feb/

14A

ug/1

4Fe

b/15

PriceNAV/share

discount

premium

‘trading at par’

Where do discounts stand currently?

10%

6%

3%

1%

-3%

-5%

-5%

-10%

-17%

-23%

Infrastructure

Property Direct - UK

Infrastructure - Renewables

UK Equity Income

UK All Companies

Industry average

Global

Global Emerging Markets

Commodities & Nat Resources

Private Equity

Sou

rce:

AIC

(as

at 2

7/8/

15)

(discount history over past five years)

Gearing

How gearing works

Total assets = £100m Borrowings = £13m Net assets = £87m

market up 10%

Total assets = £90m Net assets = £77m Chg to NAV = -11.5%

market down 10%

Total assets = £110m Net assets = £97m Chg to NAV = 11.5%

Gearing = 15%

Gearing by sector

Global emerging markets

1% Source: AIC (as at 31/7/15)

Industry average

(ex VCTs)

6%

UK equity

income

10%

Property Direct –

Asia Pacific

65%

Property Direct –

UK

18%

Liquidity

The bigger the fund, the more liquid

Smallest 25%

Next biggest 25%

Next biggest 25%

Biggest 25% of funds

Sou

rce:

Win

terfl

ood

Sec

uriti

es (d

ata

rela

tes

to M

ay 2

015)

£1.3m

£378,000

£200,000

£70,000

Average daily value of shares traded

Alternative assets

Access to alternative assets

Property

Infrastructure

Stakes in private businesses

‘Real’ assets

Property Direct

Infra- structure

Unquoted equity

Private Equity

VCTs

Sector specialists

Biotech

Debt

Mining

TMT

Regional specialists

Frontier markets

China

Latin America

Other strategies

Hedge Funds

Microcap equities

Split capital

Beyond the mainstream

Fees and charges

Average fees by sector 0.0% 0.5% 1.0% 1.5% 2.0%

UK All Companies

Global

UK Equity Income

UK Smaller Cos

Europe

Infrastructure

Global Emerging Mkts

Private Equity

Property Direct: UK

AIC ongoing chargePerformance fee

Sou

rce:

AIC

usi

ng M

orni

ngst

ar (a

s at

27/

8/15

)

Low-cost investment trusts Investment trust Sector Ongoing charge

City of London UK Equity Income 0.44% Law Debenture Corporation Global 0.46% Schroder UK Growth UK All Companies 0.47% Bankers Global 0.48% Temple Bar UK Equity Income 0.48% Scottish Mortgage Global 0.48% Mercantile UK All Companies 0.50% Securities Trust of Scotland Global 0.55% Monks Global 0.57%

Source: AIC using Morningstar (as at 27/8/15). None of these trusts has a performance fee arrangement.

Income

This can come in handy…

15% of income may be held in reserve for future

Dividend heroes Investment trust Sector Consecutive years of

dividend increase City of London Investment Trust

UK Equity Income 49 years

Bankers Global 48 years Alliance Trust Global 48 years Caledonia Investments Global 48 years F&C Global Smaller Companies

Global 45 years

Foreign & Colonial Global 44 years

Brunner Global 43 years

Sou

rce:

AIC

(27/

8/15

)

Even more dividend heroes… Investment trust Sector Consecutive years of

dividend increase JPMorgan Claverhouse Investment Trust

UK Equity Income 42 years

Murray Income UK Equity Income 41 years

Witan Global 40 years Scottish American Global Equity Income 35 years Merchants Trust UK Equity Income 33 years

Scottish Mortgage Global 32 years

Temple Bar UK Equity Income 31 years

Sou

rce:

AIC

(27/

8/15

)

UK Equity Income sector (average)

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

Year ending February

Income received each year on £100,000 portfolio

Source: AIC (UK Equity Income sector average performance)

UK Equity Income sector (average)

0

50,000

100,000

150,000

200,000

250,000

300,000

Year ending February…

Capital growth of £100,000 (if all income taken) £260,259

Source: AIC (UK Equity Income sector average performance)

In summary…

In summary • Investment trusts are closed-ended funds quoted on the London

Stock Exchange

• They may trade at discounts or premiums to their net asset value

• They can borrow money to invest (gear)

• There’s an independent board

• The closed-ended structure is well suited to illiquid assets

• Investment trusts can reserve 15% of their income to pay out later

Disclaimer Any information contained in this presentation has been prepared for information purposes only. Whilst the AIC / AIC Information Services Limited has taken all reasonable steps to verify such information, it does not accept responsibility for any errors or omissions or for losses of any nature incurred by any person howsoever caused. The information contained in this presentation does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. This presentation may not be printed, reproduced or further distributed to any other person or published, in whole or in part, for any purpose. Please refer to www.theaic.co.uk/aic/terms-of-use/ for further information relating to our disclaimer policy. The Association of Investment Companies (AIC) is a company limited by guarantee whose registered office is 9th Floor, 24 Chiswell Street, London. EC1Y 4YY. Its trading and registered office addresses are identical. The AIC is a company registered in England and Wales and its company registration no. is 4818187. The AIC is registered for VAT and its registration no. is 396992669. AIC Information Services Limited is a company registered in England and Wales with registration no. 01910539.