MARKET COMMENT
Start Your Investing Life Here

By Stuart Watson (TMFTiger)
October 21, 2004

Thanks a glut of scary headlines last week, we all know now that we're not saving enough money for our retirement. There are numerous reasons for this, but many people are put off simply because they don't where to start.

When I was a wee lad, in the investing sense, one of my first dabbles was regular savings plans from investment trusts (see this pdf factsheet for more details). Many investors aren't familiar with investment trusts. They're far more clued-up about unit trusts and their latest incarnation, OEICs (open-ended investment companies).

There are two main reasons for this. Firstly, the investment trust sector is smaller, worth around £50bn, whereas we have around five times as much, £250b, salted away in unit trusts. Also, there are a few thousand unit trusts, but only a couple of hundred investment trusts. Secondly, and far more importantly, financial advisers usually don't get paid commission for selling investment trusts. However, the lack of commission, and the fact that individual investment trusts aren't allowed to market themselves, is good for investors. That's because this translates into lower charges and, therefore, higher returns.

However, not all investment trusts have low charges. Many of those that don't are relatively small, with funds under management of £200m or less, or invest in specialist sectors (there's even one that invests in tea plantations!). The largest funds, typically found in the Global Growth sector, with assets of £500m+, tend to have annual expense ratios of around 0.5%, making them excellent value for money.

Most investment trusts run monthly savings schemes. The average amount invested per trust is £160 a month in ISA-based schemes and £80 in non-ISA schemes. It's surprising how quickly and painlessly you can build up a sizable investment. Of course, you can add occasional lump sums, too. Inside ISAs, the typical lump sum deposited is in the region of £3,000. Outside of ISAs, it's about £1,500.

It's true to say that investment trusts are a little more risky than unit trusts. They often trade at a discount to their net asset value, plus they can borrow money to invest. This make their prices more volatile, but these factors tend to smooth themselves out over the long term. However, their lower costs give investors a significant long-term advantage over other fund types. Along with the index-tracking fund, they should be welcomed into almost any portfolio.

Find out more about investing in our ISA centre and more about investment trusts here and here.