This is the age of the elephant

International general investment trusts have come into their own, says Edmund Tirbutt

THOSE WHO believe that elephants are lumbering beasts may have understandable reservations about placing money in international general investment trusts, many of which have well over pounds 1bn under management. In fact, elephants can manage a cracking pace and don't get knocked over too easily.

International general investment trusts spread risk by investing in a diverse range of markets and entrusting investment decisions to an expert fund manager. They will never be the very best performers but they will also never be the worst and they are proven survivors, many of them dating back until the last century.

Dealing with an investment that survived even the 1930s Depression has obvious attractions at the moment, when the outlook for world equity markets is at best uncertain. What is even more attractive is that shares in many of these trusts are being sold at bargain prices.

Like all investment trusts, these are publicly quoted companies whose shares are listed on the Stock Exchange. Instead of trading in goods and services they invest in the shares of other companies.

One way of assessing the attractiveness of an investment trust is to look at how its share price compares with its "net asset value" (NAV): its real worth as calculated by the market value of the shares it invests in. The two figures are rarely identical because a trust's own share price reflects the amount that investors are willing to pay for its shares at a particular time.

When a trust's NAV is higher than its share price, it is said to be trading at a discount and these discounts have traditionally widened when markets have been on a downward trend.

Some trusts are trading at their biggest discount for 10 years. Charlie Simkins, director of Greig Middleton Stockbrokers, says: "These trusts give you a broad spread of investments and the benefits of expert fund management. The fact that their discounts have widened due to volatility and setbacks in the market now presents investors with a good buying opportunity.

"In the first five months of the year, the majority of these trusts considerably out-performed the FT-SE 100 index and the discounts narrowed. In recent weeks, however, they have performed considerably worse than the market as a whole and the discounts have widened. They are definitely one of the most attractive sectors at the moment."

Investment trust experts, when asked to name those international general trusts they consider to be good value, do not point to either the Personal Assets or Law Debenture Corporation trusts, which have been the sector's top performers over the last 10 years.

This is because the share prices of both these self-managed trusts reflect their good track records and, instead of trading at discounts, their share prices are actually higher than their net asset values - this is an unusual situation known as trading at a premium.

Many of the trusts recommended by experts (see box) now have discounts that are considerably wider than before the recent market correction. In some cases there are discounts of 16 to 18 per cent compared with between 10 and 13 per cent earlier this year.

These discounts should narrow once again when confidence returns to the market. Also, many of these trusts have plans to buy back their own shares once tax changes have been introduced next April, which will probably make discounts much narrower. Buy now if you can afford it.

The fact that Personal Equity Plans (PEPs) are due to be replaced by the new Individual Savings Accounts (ISAs) next April should also help. All international general trusts will be eligible for ISAs but few have qualified for PEPs in full because they reserve the right to invest over half their portfolios outside the UK and Europe.

This has undoubtedly limited demand for their shares because investors have preferred to look elsewhere in order to take advantage of the full pounds 6,000 tax-free PEP allowance.

At the moment you can only invest pounds 1,500 a year via a PEP in most of the trusts listed below. The exceptions are Henderson's Witan trust and Baillie Gifford's Scottish Mortgage, trust which qualify for the full pounds 6,000 allowance.

Nevertheless, experts are not expecting discounts in the sector to become much narrower than 10 per cent. And while returns during the next few years could be attractive, they will not be spectacular.

Gavin Suggett, the managing director of both the Alliance & Second Alliance trusts, is hoping to produce average annual returns of 5 per cent above inflation over the next five years, despite the current volatility. Such a rate should be considerably better than that produced by a building society account.

This sort of general investment trust is a good bet for those who are making their first stock market investment, not least because many trusts allow you to invest from pounds 25 a month upwards. Financial advisers are less likely to regard international general investment trusts as suitable vehicles for sophisticated investors who are prepared to take above-average risks.

Gavin Haynes, investment manager at Whitechurch Securities, an IFA in Bristol, says: "Whilst the discounts can look attractive, the fact that quite a few of these trusts are very large and unwieldy beasts limits their upside potential because it can be difficult to buy stocks with huge potential in any quantity.

"If a client wants to have just one fund in equities then perhaps they are not such a bad idea but for those with the funds to diversify between a number of areas, we feel we could get better value by selecting several different specialist trusts, opting for investment houses with particular regional strengths."

Even if you can afford to make lump sum investments, bear in mind that during the current volatile market conditions, a regular savings scheme makes more sense.

This should smooth out the effects of share price fluctuations in the long term because your contributions will buy more shares when prices are low than when they are high.

A fact sheet on investment trust discounts can be obtained from the Association of Investment Trust Companies (0171-431 5222).

leading general trusts

Trust Manager Share Price Gross Current

Yield % Discount %

Foreign & Colonial Foreign & 161 1.9 16

Tel: 0181 880 8120 Colonial

Management

Bankers Henderson 206 3.5 17.3

Tel: 0800 212256

Witan Henderson 306 3.0 16.2

Tel: 0800 212256

Scottish Mortgage Baillie Gifford 284 2.4 18.9

Tel: 0131 2224000

Alliance Self-managed 2,437 3.2 16.5

Tel: 01382 201900

Second Alliance Self-managed 2,182 3.1 15.4

Tel: 01382 201900