Investment Trusts: Money maker still ahead of the game after all these years: Rupert Bruce checks on an investment that may have lost some of its shine but not its edge over the competition

INVESTMENT trusts have shot to popularity with the private investor over the last few years because they are deemed to be more suitable than individual shares, and either better performing or cheaper - sometimes both - than rival investments.

Philip Chappell, the late director of the Association of Investment Trust Companies and a champion of the small investor, engineered this renaissance. Its cornerstone was a clever public relations campaign. But investment trusts have become victims of their own success. While their advantages still exist, they are not as overwhelming as they once were.

The public relations campaign's first point was that investment trusts were more suitable than normal shares for most private investors because what they bought was a stake in a professionally managed and well-diversified pool of shares.

The second point was that investment trusts had traditionally performed better than rivals. A glance at figures compiled by Micropal, the investment statistics specialist, shows they have, on average, proved a better bet than unit trusts, life insurance savings policies and high-interest building society accounts. One hundred pounds invested in the notional average investment trust five years ago would be worth pounds 173.47 today, whereas pounds 100 invested in the rival investments would be worth pounds 164.31, pounds 153.92 and pounds 151.74 respectively.

Last, it said investment trusts were the cheapest pooled equity investments. The initial costs consist of the dealing spread, often a little under 1 per cent for old-fashioned general trusts, the stockbroker's commission, about 1.65 per cent, and stamp duty of approximately 0.5 per cent. Annually, the old-fashioned trusts charge between 0.3 and 0.5 per cent. Anyone buying an investment trust via a savings scheme would, in most cases, find the initial costs lower still.

Unit trusts tend to be considerably more expensive. According to the Association of Unit Trusts and Investment Funds, the true initial cost is between 6 and 8 per cent. The annual cost varies between 0.5 and 2 per cent. Life funds are still more expensive. Deborah Simon, a financial adviser at Fiona Price & Partners, said charges were levied in different ways. In a 10-year insurance savings plan, for example, she said all of the first year's contributions might go in costs, and there would be still more charges.

But Hamish Buchan, a director of equities at NatWest Securities and member of the investment trust analysts' team that has come first in its sector in the Extel beauty parade for 19 of the last 20 years, said the attractions of investment trusts, although still relatively strong, had weakened over the past few years.

Ironically, the performance of investment trusts has benefited from their new-found popularity. As demand for them has grown, so long-standing discounts between the values of the trusts' underlying investments and their stockmarket capitalisations have narrowed. This has meant that the prices of investment trust shares have risen faster than the value of underlying portfolios.

Mr Buchan said investment performance would not be geared to this extent in future because the narrowing of the discount was a one-off gain.

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