Tamsin Brown explains why investment trust savings schemes are an attractive option in volatile times.

In the hangover from the credit crunch, the mantra that we should be saving more is hard to avoid. But with the uncertainty that goes hand-in-hand with an economic recession, many investors will not be feeling flush, or indeed confident, enough to pour large sums of their savings into the stock market.

That is why tucking a little way each month can be a good way of easing investor jitters. And a relatively cheap way of doing just that is to use one of the regular savings schemes that invest in closed-ended investment vehicles.

Lowering the costs
One of the main advantages of regular saving is known as ‘pound-cost averaging’. When investors buy on a monthly basis, they will buy more shares when the market is weak, because their regular investment sum will go further, and fewer shares at the top of the market. This means that, in a volatile market, the average price per share paid by a regular monthly investor works out to be lower than the average market price. It also removes the risk of unwittingly putting a large lump sum into equities when prices are close to their peak.

Annabel Brodie-Smith, communications director for the Association of Investment Companies (AIC), points out that ‘The advantage is that you smooth out the highs and lows and you give yourself a lower risk profile than that of a lump sum investor. But if you time it correctly, a lump sum invested may do very well.’

The AIC recently carried out some research that compared regular saving with investing lump sums. It found that, in the past few years of gyrating stock markets, investors would have been better off drip feeding their money into their investments rather making a lump sum investment.

A £50-a-month regular investment into the average investment company over the year to 30 April 2009 would have lost seven per cent of its value and fallen from £600 to £558. Meanwhile, those who invested the same £600 as a lump sum at the beginning of the period would have seen a 30 per cent loss on their investment. Over three years, a regular investor has still performed better than a lump sum investor.

The AIC also publishes factsheets and directories of savings schemes (www.theaic.co.uk or tel. 0800 085 8520).

Swings and roundabouts
However, over the longer term, lump sum investors are the winners. In the past decade, someone who invested £6,000 in one swoop would be sitting on an £8,648 pot, while those that spread that sum across the ten years on a monthly basis would have only seen their sum grow to £6,921.

The difference becomes starker over 20 years, when a £12,000 initial lump sum investment would now be worth £48,120, compared with £22,313 had the same sum been drip fed over the two decades.

But these examples don’t allow for the fact that many investors simply don’t have £12,000 to throw into the stock market at any given time. James de Sausmarez, head of investment trusts at Henderson, says ‘Not everyone is in the luxurious position to invest a large lump sum, and not everyone feels that confident about timing the market right. They might feel that putting it in over a period of time is a more sensible way.’

Most people will have lost money on their existing investments in the past year or two, and it is hard to know whether we really are over the worst. It requires a strong conviction in an impending economic recovery to make someone want to put large amounts of money into financial markets at the moment. With equities still volatile, regular saving removes the dilemma of working out when to start investing again, and arguably in choppy markets pound-cost averaging means it is the best way to invest.

Global coverage
Investors looking for a regular savings plan will find plenty of advantages in using closed-ended investment companies. Investment trust saving schemes have been around since the 1980s and offer an ideal solution for investors who don’t have the time or confidence to build up an investment portfolio on their own. A single investment company can invest in a broad mix of assets, creating a diversified portfolio, as opposed to being heavily exposed to one market or another.

Jonathan Gumpel, director at investment manager Brooks MacDonald Asset Management, argues ‘The good thing is that the big global investment trusts are high-calibre investment funds and yet they are generally focused, unlike most unit trust managers which are more sector specialised.’

They are ideal for those who have money they want to set aside each month to start investing for the long term. But they are probably not so suitable for investors that want to jump in and out of the market quickly and often.

Sherry-Ann Sweeting, marketing manager at SIT Savings, which administers savings plans for the 122-year-old Scottish Investment Trust, says, “Investment trust savings schemes are used by novice investors who don’t have the expertise or desire to go out and pick the stock themselves, but also by people who want access to the stock market but don’t have the time to do all the research.’

Regular saving plans also prevent investors from getting carried away in a bull market
and buying piles of expensive shares. Adrian Lowcock, senior investment adviser at Bestinvest, says, ‘In markets such as we have at the moment, one of the under-recognised advantages is not having to call the market.’

Flexible terms
Another advantage of investment trust saving schemes is that an investor can inject a regular fixed sum into their savings pot every month as well as making lump sum investments whenever they want to.

They can start by tucking away very small amounts with some minimum monthly investments of £20, although £50 is more common. Lump sum minimum investments tend to be £250 or £500. Dividends can also be automatically reinvested for regular savers, and research shows that this can be the biggest driver of returns over the long term.

Regular saving plans in closed-ended funds are also very flexible. Some allow you to buy shares as a gift, perhaps for a child or grandchild, and can be an ideal way of saving for a relative’s future. BlackRock, Franklin Templeton and SVM Asset Management are among the investment managers offering a gift facility on their schemes.

Investors are also not confined to buying shares in just one investment company. They can hold a number of different investment trusts within one plan, although normally their portfolios would be run by the same investment management group. The scheme run by Alliance Trust Savings is a popular exception, allowing access to a full range of investment companies, open-ended investment funds and UK listed shares.

Investment trust saving plans have the added bonus of being relatively cheap, because they give investors access to the market without having to go through a broker.

An investment company will bundle all the regular payments it receives together and gets a discount through bulk dealing. It can then pass that benefit on to the investor. Many investment managers buy once a month for their saving plan investors but quite a few do buy daily and weekly.

Comparative advantages
Most have no initial or management charges. This makes them good value compared with other types of investments such as unit trusts. SIT’s Sweeting says, ‘In comparison with unit trusts, which often have a five per cent initial charge, investment trust saving schemes are very cost effective.’

She adds, ‘You have the flexibility of being able to put in a lump sum or start up regular savings, or do a combination of both. With investment trust savings schemes, if you want
to sell after a short time there are no penalties, there are just the selling charges.’

It is, however, worth researching all the costs involved as they do vary widely from investment manager to investment manager, particularly the charges for purchasing and selling.

The first investment trust savings scheme was launched in 1984 by the Foreign & Colonial trust, which also happens to be the oldest closed-ended investment vehicle. It has purchase and sale charges of 0.2 per cent, equating to 10p on the £50 minimum monthly investment, and offers an online application service.

Alliance Trust’s savings scheme is rather different to its rivals in that it allows investors to put money into other companies’ trusts as well as its own. But its purchase charge is between £2.50 and £15 plus 0.2 per cent, and its sales charge is £15 to £30 plus 0.2 per cent.

Henderson has transferred the dealing on its investment trusts to Halifax Share Dealing. This means that its regular investors pay a flat £1.50. So if they are putting in the minimum £20 it works out relatively steep, but becomes more competitive the more investors tuck aside each month.

Conversely, regular savings into trusts managed by Aberdeen Asset Managers have no purchase costs but they do have a £10 sale charge, while those investing in the Witan trust face one per cent purchase and sale charges or a flat £15 if they were to do it online.

The recent recovery in the stock market may be luring investors back into equities, but top managers are split on when the economic recovery will begin. For those feeling pessimistic but not wishing to miss out on a further rally, drip feeding regular sums into an investment trust could offer the best of both worlds.