Sour aftertaste of flavour of the month

NEW and exciting investment trust launches have tended to capture the public's imagination in recent years. Two - the Mercury European Privatisation trust and Kleinwort Benson European Privatisation trust - between them took a staggering pounds lbn from investors. However, these two blockbusters, launched early last year, serve as a stark reminder that buying a new trust simply because it is new and has a colourful marketing story is not necessarily going to bring bountiful gains - at least not in the short term.

Both trusts were designed to capitalise on budding privatisation programmes in continental Europe. No doubt many investors thought they were going to make the kind of fast buck they made from UK privatisations. But soon after the trusts were launched, interest rates in the US began to rise, signalling a halt to stock market bull runs in a number of countries and encouraging investors to take flight. Pretty soon the share prices of the two trusts plummeted.

Mercury and Kleinwort investors were last week holding shares priced at 87.5p and 80.5p respectively, down from the 100p paid at launch. Admittedly launch investors were also given one warrant for every five shares bought, which gives some additional value. And the value of the underlying assets (known as Net Asset Value) is considerably higher than the share price. Lough Callahan, managing director of Mercury's investment trust division, points out that the underlying investment performance of the Mercury trust has actually been good, with it being one of the stars among European funds over this period. It is the hefty discount to NAV the trust's shares have languished at that has hit investors' returns.

There are more recent examples of flavour-of-the-month trusts not performing terribly well. Take two of the more specialised trusts launched by Fleming Investment Trust Management. Each of the trusts - Fleming Indian (launched last May) and Fleming Natural Resources (launched last November) - had an original share price of 100p, again with one warrant handed out with every five shares.

Fleming Indian's share price had dropped to 66p last week and Natural Resources stood on a 13 per cent discount, with a share price of 93p and a NAV of 104p.

"The key point for investors to determine is whether there is a good investment rationale behind the launch," said James de Sausmarez, managing director of Henderson Touche Remnant Investment TrustManagement.

His company launched the HTR Income & Growth split capital investment trust in February this year, raising nearly pounds 40m from investors. The trust invests in larger UK companies, and in addition to offering income shareholders a yield of 7.5 per cent, the capital performance has been healthy.

Conventional wisdom would have us believe that new investment trusts make good investments because the fund manager is starting with a clean slate, rather than inheriting a number of stocks he doesn't like. This, it is said, should enhance performance. Critics of new launches argue that if there is a similar trust in existence, investors should consider it first.

Bridget Cleverly, head of marketing at Schroder Investment Management, said: "Investors need to look at the reputation and the track record of the company."

Schroder launched two trusts this year - the Schroder Income Growth Fund, which aims to achieve income growth from a portfolio mainly of high- yielding UK equities, and Schroder Asia Pacific, which invests in growth companies in India, Pakistan, Indonesia, South Korea, Singapore, Taiwan and Thailand.

The biggest launch so far this year is Scottish Amicable's pounds 160m Dumyat investment trust. This was designed as the underlying vehicle for the company's Guaranteed PEP, which was launched in March. Investments between pounds 3,000 and pounds 4,999 were offered 7 per cent a year gross, those between pounds 5,000 and pounds ll,999 7.5 per cent, and investments of pounds 12,000 7.65 per cent.

Put simply, the company hopes that the trust will generate the returns required to meet the guarantees, but if not, Scottish Amicable will put its hand in its pocket.

Last year was a bonanza period for investment trust launches, with 45 new launches raising nearly pounds 4bn. This year they have slowed to a steady trickle, with 11 issues so far raising pounds 450m. The latest include funds investing in Japan and Asia.