19 May 2011 | Opinion

Diary of an Investor Part 1 - In the Beginning

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It all started with a credit card rewards scheme and a young man’s growing recognition of the need to invest for the future beyond just cash savings (even with bank interest rates then nearing 10%). From the rewards scheme I amassed enough points for a set of kitchen knives, and with fortuitous timing saw an advert inviting me to purchase a complete guide to investing in bi-weekly parts.

Over the weeks two faux suede binders arrived, filled with chapters on stock markets, stock-picking and ratios, the importance of knowing your appetite for risk and loss, and some investors’ ‘mantras’ to consider - long-term performance of equities over cash, don’t invest if you don’t understand, the impact of charges and commissions over time - all often easier said than applied.   The chapters moved on to commodities, fine art and futures - areas I had little realistic hope of access to with small investments back then - until a chapter on ‘Investment Trusts’ arrived.

This explained that investment trusts, while being pooled funds like unit trusts, offered a different approach for a small investor. Unit trusts were open-ended funds offered by a fund management company, buying or selling investments depending on inflows and outflows of investors’ money.   Investment trusts, on the other hand, were companies in their own right aiming to make money by investing assets in other investments, and as an investor you became a shareholder in the investment trust company, benefitting (hopefully) from the profits of this activity.

Investment trusts were billed as “the City’s best kept secret” and were little known by retail investors. The few that did advertise promoted their investment values and approach, rather than just their position in last year’s quartile rankings, which to me suggested a long-term approach consistent with my own goals. Furthermore they were not paying commissions to intermediaries and generally had lower charges.   Research also showed me that the top-performing investment trusts often out-did their equivalent unit trust cousins in many sectors.

Applying what I had learned I decided my investment approach was to use equities, taking a 3 – 5 year view, and buying through pooled funds to spread risk, having concluded (not before some trial and error) that I had neither the time, inclination, nor resources to analyse and pick a sufficient range of individual stocks myself. A monthly investment suited me too, reducing the risk of timing lump sums, and to bring the discipline of regular investment. I chose investment trusts as the vehicle in to equities, a strong part of the appeal being that I was buying into a company rather than just a fund, and many investment trust savings schemes offered low entry levels (£25 per month) and minimal charges (often no dealing charge) so I could already afford to spread across more than one sector. I researched in the Financial Times, investment magazines, AIC (Association of Investment Companies) factsheets to understand sectors, performance and holdings of a range of ITs (all paper-based, as this was still pre-internet days).

Initially I opted for two sectors - a ‘generalist’ trust as a core holding for exposure to major equities and markets, and something more risky in the private equity sector with potential higher returns from fledgling companies over a longer term, and a sector I could not readily invest in directly.

For the generalist I chose the Edinburgh Investment Trust – a large, long-established trust with Victorian origins, well-diversified in UK markets and with decent growing dividends, perhaps even ‘boring’; and for private equity I chose Graphite Enterprise Trust (then known as Foreign & Colonial Enterprise Trust), one of a handful of specialists in the area with a track record, and an active approach to participation in its investments. Both offered low-cost saving schemes and I began with £30 per month in each.

That was over 20 years ago.   So where are they now? Of the kitchen knife set only the bread knife gets an occasional outing, the rest long gone. Of the two investment trusts both are more enduring and rewarding. I continue monthly investments in both trusts, with the same motivations as when I originally invested, and both remain core holdings in my current long-term portfolio which now consists of a range of investment trusts.

The Graphite Trust has been my most successful; the share price is currently 12 times my first monthly investment at 29p in 1991. I have realised profits from the holding at various stages, funding holidays and furniture purchases, and to rebalance the portfolio, while continuing monthly investments throughout. The discount (the difference between the trust share price and the estimated Net Asset Value of its investments) has been a useful guide here, as I have taken profit when this has gone to zero or a premium, the discount usually falling back again, and topped-up when the discount widens.

The Edinburgh Investment Trust has ‘done what it said on the tin’. It has not always been the greatest performer, but still delivered a reasonable return with dividends and averaging of monthly purchase. For some years it was lacklustre and I stopped monthly investment, redirecting to another trust for generalist exposure, but it has recently improved with a change of fund manager. This illustrates one benefit of investment trusts as independent companies – the directors can put pressure on the fund management company employed, or even change them as Edinburgh has twice done in the last 10 years, to improve performance. As with Graphite Trust, I have sold parts of the holding over recent years, funding a deposit for a car purchase.   Recently I increased monthly investment through an ISA, the appeal being a relatively high dividend and a more focussed investment remit under the new fund manager.

Having followed these two trusts closely over the years, through annual reports, management changes, and discount trends, I feel I have some affinity for them to deliver and an understanding about when to realise profits. Perhaps that runs counter to the advice not to get ‘attached’ to a share – but it is working for me as a long-term strategy and I believe in ‘don’t fix it if it works’.