If you have browsed many other pages on my website you can see I am not the greatest fan of star fund managers. Trying to decide which ones will out-perform their benchmarks, and when, is profoundly difficult. I’m not going to go into the pros and cons once again suffice to say this picture says it all in my mind.
Therefore my latest fund purchase looks as though I have changed my position. On October 21st I bought The Edinburgh Investment Trust managed by the biggest star fund manager of them all – Neil Woodford. Another first for me was the fact that I made the decision to buy whilst onboard a ship. My iPad doesn’t care where the wifi comes from. My instructions can be relayed back to the office from anywhere in the world.
What’s an Investment Trust?
Simply it is a company listed on the UK stock exchange which invests in other companies listed on stock exchanges across the world. It differs from a fund because like all other companies, the number of shares available are fixed. Whereas a unit trust simply creates or cancels units to meet demand. With an investment trust if demand is high the share price goes up, if demand is low the share price goes down. So all your basic supply and demand rules are in play.
So why did you buy it?
I didn’t buy it because I believed that Neil Woodford can consistently beat the market all the time; I bought it because many others believe he can beat the market all the time. You see Neil has announced his retirement; active fund manager believers panicked at the prospect of not having their demi-god at the helm and promptly sold. If you were keeping up you will remember that investment trusts can’t just cancel shares and are subject to the basic laws of supply and demand. When a large number of individuals want to sell the price must fall. And it did. Prior to the announcement you had to pay £100.50 for £100 worth of shares carefully chosen by Neil. Post announcement you only had to give £90 for those same carefully chosen shares. I could buy £100 of shares for only £90 – let’s do it.
So how has it done?
Its a bit early to tell yet but it has outperformed the market. Also the discount has closed right up so £99.15 is now required to buy £100 of shares. The window of opportunity has closed.
Since I bought the FTSE 100 has moved up by 1.5% and the Edinburgh Investment Trust has moved up by 4.32%. This figure takes into account a dividend we received in November.
So we can look at this in two ways.
- It’s an encouraging start and has been better than just tracking the index or leaving the the funds as cash which earns less than 1% over an entire year.
- But if the discount has closed by almost 10% and the market is up 1.5% but our fund is only up 4.32%, what has happened? I can’t get the maths to work.
So what next?
By March Neil Woodford will be returning to investment management with his own firm. The £20 billion he managed at Invesco Perpetual will be looked after by others. Almost £2 billion has left already. In March we might find he resumes his management of The Edinburgh Investment Trust. Let’s wait and see.