GeoffF100 wrote:(1). The more popular ITs rarely sell at significant discounts.
(2). Market weighted trackers are cheaper than ITs. In particular, ITs have larger transaction costs, unless they are really market weighted trackers.
(3). ITs can borrow at a high cost to magnify losses. You can gear up if you wish. Most people do the opposite and hold bonds to reduce risk.
(4). The popular Vanguard ETFs do not use derivatives. There is nothing much wrong with derivatives anyway. Dodgy managers mess up funds, not derivatives.
(5). Some ITs do specialise hold illiquid assets, but they are usually expensive. The cost will probably outweigh any illiquidity premium that you were hoping to reap. You can get (cheaper) illiquidity factor ETFs. They effectively become ITs trading at a big discount if there are big redemptions and the underlying assets cannot be sold.
(6). Most of us just use nominee accounts.
(7). Market weighted trackers only buy new holdings when they enter the index for the first time. You do not have to buy a market weighted tracker if you believe that it is overpriced. Fund managers do not have better than chance skill at timing the market. If you lack that skill too, and bought your tracker long ago, you ride the market up and ride the market down. Hopefully, you will end up higher than when you bought.
It is also worth mentioning that you have to pay stamp duty when you buy ITs. The Exchange Market Sizes are also low. and the spreads are wide, for all but the very largest ITs, making it difficult and expensive to do large trades.
1) Two very popular investment trusts are Finsbury Growth and Income (currently on 4.4% discount) and Henderson Smaller Companies (currently 9.1%). I remember buying Caledonia Investments on a 40% discount (currrently 22.6% though the NAV is a fortnight out of date) and bought a load of Henderson Smaller Companies at a discount close to 20% some years ago.
2) Some market weighted trackers are cheaper. Not all of them.
3) True. Borrowing cuts both ways
4) I'm firmly in the Charlie Munger camp regarding derivatives. Keep away from them as far as possible.
5) Yes, private equity trusts can be more expensive. That's why I prefer to own shares in the big private equity and alternative asset managers (Brookfield, Carlyle, KKR, etc.)
6) What if there is a nominee account problem? These have happened in the past, usually due to poor record keeping (something I've seen at first hand having had to do some work many years ago on untangling clients' pensions in the Maxwell Group schemes). Nominee account failure is one of those low probability (but potentially massive loss) risks that Nassim Taleb talks about, but if it happens a lot of people are going to be up the proverbial creek if only because they can't get at their money for some time.
I prefer to trade off a bit of investment return due to higher costs for a bit more security. I'm more interested in preserving the real value of what I already have (and which I live off) than chasing higher returns.
7) Manager skill is a thing which does exist. See The Superinvestors of Graham and Doddsville:
https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-DoddsvilleThat said I don't put too much in investment trusts (currently about 33% of the portfolio), having increased from about 5% shortly after I retired. My ITs are mostly to cover myself against my operating company selections not being as good as they used to be (I will never again achieve anything like I did with my operating company picks in the 2000s).
The stamp duty cost on an annual basis is trivial if you hold an investment trust for many years.