Yahoo Finance Millennial investor: is the best time to buy really when no one else is?
The financial diary of a twentysomething's quest to invest her way on to the property ladder
If you’d tried to sell a signed photo of Mick Jagger when he was merely a humble porter at Bexley Hospital, people would have laughed in your face. Now fans will happily part with tens of thousands of pounds for a leather jacket signed and worn by the singer.
This is because the world is governed by supply and demand – and the rules are the same whether you’re buying rock star memorabilia, bidding for a designer handbag on eBay or investing your money in the stock market.
After my previous columns, readers emailed to tell me about the existence of investment trusts, which are essentially funds that trade like shares, whose price depends on supply and demand.
“You’re investing in funds? You might as well throw your money down a drain,” one reader said. “Go for an investment trust.”
From my decoding of the jargon on investment websites, I have learned that the difference between the two is that funds are “open-ended”, meaning that you can generally buy them directly from the fund manager at any time, whereas trusts are “closed-ended”, so there are a limited number of shares that can be bought.
If you want to buy a stake in an investment trust there must be someone willing to sell theirs, and vice versa. When there is a lot of demand to buy, the price goes up and you have to pay more. This is called “paying a premium”. If there are more sellers than buyers, the price drops.
Historically, investment trusts have vastly outperformed funds. According to the Association of Investment Companies, a trade body that admittedly has a vested interest, the average investment trust has achieved returns of almost 300pc over the past 10 years, compared with 156pc for the average open-ended fund.
Currently, many investment trusts that specialise in investing in British companies are trading at a discount. This means that their share price is less than the per-share value of the investments that they hold.
Since 2016 Britain has been seen as the Britney Spears of global investments: once the world’s darling, then a bit unpredictable, with a constant question mark over what’s going to happen next. As a result, many investors have been hesitant about putting their money into British companies.
But hard Brexit, soft Brexit or no Brexit, many are still great firms with bright futures. Maybe the best time to buy is when no one else is. After all, if Britney can recover from shaving her head in 2007 to release a number one single and the most watched video on YouTube just a year later, surely British companies can survive whatever Brexit has to throw at them.
So how can I go about cashing in on some of these “unloved” British stocks?
Like many rivals, my online broker lets me search for investment trusts by sector, so I can find those that specialise in British companies and check their premium or discount and what returns they’ve made so far.
After some research I’ve settled on Henderson Smaller Companies, which is now trading at a 9.1pc discount and has performed well over the past decade. If I’d invested my £10,000 in the trust 10 years ago it would have grown by more than 700pc to £81,125 today, after taking into account its management fees (data to end of March). It has been managed by the same person, Neil Hermon, for 16 years.
Mr Hermon looks for innovative companies that he believes to be undervalued and to have huge potential to expand over the long term. As a young person investing for a house deposit over 10 years, this suits me perfectly. This is because, over a long period, smaller companies are more likely to grow your money than big corporations that may already have peaked in value.
For example, a few years ago the trust invested in a little-known healthcare provider called NMC Health for 210p a share. It then grew rapidly and when Mr Hermon sold his shares they were worth more than £35 each. Who would turn their nose up at that?
The trust focuses on areas where there is potential for this kind of growth, such as electronics and financial services, including “challenger” banks.
Since 1955 smaller companies, also known as “small caps”, have grown six times more than large ones: just £100 invested in the average smaller British company then would now be worth £600,000.
However, there is one disadvantage to investing in this (or any) sector through an investment trust rather than a fund: trading fees.
My broker charges me a 0.45pc annual fee on every fund I hold with it, but there is no cost to buy and sell funds. However, I have to pay £11.95 every time I buy or sell shares in a company or an investment trust (although you can pay less if you deal more often).
To avoid wasting money on transaction fees I’ve decided not to “drip feed” in my money in gradual instalments as I’d planned, but put a lump sum of £1,000 straight into Henderson Smaller Companies.
What do you think? Was I right to back British? Send your thoughts to marianna.hunt@telegraph.co.uk
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