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How I use investment companies: James Pigott BSc (Hons) MCSI

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1 January 2014

Pigotts Investments Limited, Dorking.

Pigotts provides bespoke, personal portfolio investment management for private clients. Advice is based on a detailed understanding of our clients’ needs, often extending the service to immediate members of the family, where tax planning plays an important part.

To ensure we deliver the desired level of growth, or the right level of income from investments, we work closely with clients before making any decisions. Our advisory service includes a detailed discussion of the clients’ needs and circumstances, to ensure clients receive the growth or income from investments they are looking for.

We are strong advocates of investment trusts and closed-end companies, ‘the City Secret’. These excellent investment vehicles have been used for over 140 years, and generally outperform open-ended classes such as unit trusts and OEICs. The strengths of investment trusts become especially noticeable in volatile economic times like the present.

Funds under management
£20m to £25m managed on an advisory basis, with 100% of those investments being in closed-ended funds.

How do you use closed-ended investment companies?

Mainly in bespoke portfolios within ISAs, SIPPs and general investment accounts, all on a platform. Due to their income smoothing, and income growth potential, they are well suited to provide income for those who need it.  Otherwise, a good diversified portfolio can provide excellent growth, since this is currently found in the smaller companies and mid cap range where the closed-ended vehicle is best suited.  I also use the property trusts, both a REIT and TR Property.  I’m less keen on alternatives, I never truly understood all the specialist debt trusts that took over what the bankers offloaded (except vanilla bond and secured loan ones), and I don’t use hedge funds or absolute returns.  I like some ordinary shares of splits and have a racy account that uses subscription and split capital shares.

Do you use model portfolios?

I have two for income (high income and medium income) and one for protection but they account for less than 3% of my funds under management.

What do you like about closed-ended investment companies?

Everything!  In order though:

  • Income smoothing and use of reserves (this is now including capital, although I’m not really keen on this unless in an emergency, which is how the boards see it too)
  • Value play on discounts (only a few trusts left in this bracket now)
  • Income growth potential
  • Property, small cap and similar assets best fit the model
  • Gearing can produce outperformance, and generally has done over the decades
  • Investment trusts will not be forced to invest when prices are high and nor will they be forced to sell when the market falls, therefore they are the ideal long-term vehicle.  My philosophy is for the long-term and not the’ quick buck’.
  • The boardroom is a better place to manage a trust than a set of self-interested trustees.  There are far too many unit trusts that should have been closed down, but they linger on with unwitting investors supplying the managing firms with fees.  A company is swiftly wound up if enough shareholders are dissatisfied.
  • Some of the trusts are below most institutions’ radar and so I can pick up some good deals
  • Subscription shares are an exciting way to add some real movement to a portfolio (in both directions if not careful).  I just wish more were around.

Do you favour certain geographical regions when thinking about investment companies for clients?

Not really, favourites change over time!  The Far East was useful for growth but we now have to wait a little before we can add to that.  Europe will be promising but for now the UK has some good potential.  Overall though, I would tend to opt for a fund manager with a “sound” investment strategy before evaluating the sector he or she is invested in.

And what do you dislike?

Life Offices, unit trusts and OEICs, tax, pension legislation, investors being charged bespoke rates for a model, and much more!

What could boards or the AIC do to help advisers understand these investments?

The main drive must be to get platforms to offer investment trusts to investors/advisers.

Are there any tips or thoughts you could pass on to other advisers to help them understand or advise on these types investments more frequently?

The investment trust universe will only suit your client (and adviser) if you believe in a similar strategy.  That strategy, I think, is a long-term one.  Due to gearing, and fee structures, they generally outperform open-ended versions.  To overcome the issues of liquidity they need to be available on platforms and more to start trading in them.  Just start with a small spread of large trusts and see how they behave.  As more do this it will increase the liquidity, then as they are more understood advisers can move down the market cap scale and start to increase the liquidity of smaller trusts too. They are not old and out of date vehicles, they do have their place and advisers must not be put off by the like of Hargreaves etc. who say they are too illiquid.  They may currently be so for them, but for IFAs managing £50m or so there is not really an issue.

The AIC should be mindful that we are in danger of some trusts trying to emulate unit trusts (Personal Assets for example). For a few it can work (same example) but this cannot work for other trusts with less liquid assets.  Each trust has to find the range of discount it is comfortable with despite the pressures from the likes of Charles Stanley.

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