International trusts lose their appeal

Fat, out-of-shape, unpopular, and undergoing a mid-life crisis: international general equity funds are fast becoming the whipping boy of the industry.

These are investment trusts that can invest anywhere in the world, and are not tied to producing income or capital growth. There are 15 such trusts, and they share around pounds 11bn of assets. Yet the rationale for their existence is becoming increasingly difficult to sustain. Day-by- day they look a little bit more anachronistic.

Today's sophisticated retail investors, unhappy about leaving the decision- making to someone else, are a thorn in the side of the trusts. "If you hold ICI, you may as well hold it direct," said Richard Templeton, a director at Robert Fleming.

The malaise is reflected in the share prices. International equity trusts can now be bought for an average of 14 per cent less than the underlying value of the shares they hold, according to the Association of Investment Trust Companies. That's one of the widest discounts among the 19 different sectors of which the funds are comprised. Compare it to UK smaller companies on an 11 per cent discount; growth trusts, Japan and emerging markets, all on seven per cent discount; and continental Europe on six per cent.

Foreign & Colonial Investment Trust is the funds' doddery grandfather. It has been around since 1868, and has assets of pounds 2.1bn and 100,000 shareholders.

A year of poor performance, management uncertainty and an end to its brief inclusion in the FT-SE 100 index saw FCIT's share price go from a premium to net asset value, to a 12 per cent discount in the past year.

"The fact that we had a bad year in asset terms meant we had a widening of the discount," said FCIT's Jeremy Tigue. "We were perceived to have lost our touch and to have made mistakes. If we can show we have better performance, and are doing more interesting things than our rivals, that's the best protection we have against takeover."

He points out that while the discounts on the funds are now widening, they're nothing like the 30 per cent plus seen in the 1980s. Yet they're big enough to attract the attention of someone who'd like to acquire the assets on the cheap.

These funds are unpopular with institutional investors. Many institutions are loath to add the extra layer of management, with the attendant costs investment trust shares entail.

That's the thinking behind the decision of British Coal Pension Schemes to liquidate British Investment Trust. It owns 85 per cent of the fund and will be able to cash in its shares at their net asset value.

It was also BCPS which in 1990 carried out the biggest ever hostile investment trust takeover - that of Globe Investment Trust.

While discounts on funds will widen if the area they invest in goes out of favour, beneath those fluctuations is an acceptance of their specific role. "Institutions will buy investment trust shares to get expertise in particular areas," said Mr Templeton.

The increasing use of personal equity plans (PEPs) by retail investors has dented the attraction of the general international investment trusts. The PEP is the king of the savings castle. Although investment trusts with qualifying contents are Pep-able, unit trusts have exploited the market more effectively. It's the international generalists who are unwilling to maintain 50 per cent of their assets in Europe that disqualify themselves from PEP status.

Yet the international generalists need not feel they are approaching their death bed. Many in the industry think they still have a role to play.

"For retail investors, they're good, solid performers," said Ernest Fenton, AITC Director-General. "The larger ones have low costs, with annual fees of perhaps a tenth of what a comparable unit trust would charge."