View from City Road: Investment trusts in virtuous circle

The investment trust - the collective investment that, unlike unit trusts, has its own quote and can borrow money - is undergoing a renaissance. Although outpaced by unit trust investment during 1993, which leapt from pounds 1.4bn to pounds 10.8bn, the investment trusts are also taking in savings in unprecedented amounts.

A pounds 2bn jump in net investment by the trusts helped to push institutional investment to a record pounds 14.9bn in the fourth quarter of 1993. This coincided with the launch of a series of investment trusts aimed at new corporate investors in Lloyd's of London and the hefty pounds 414m Mercury World Mining trust.

So far this year Kleinwort Benson and Mercury Asset Management have launched European privatisation trusts worth over pounds 1bn. There is also an Israel Fund, but the setback encountered by emerging markets since the Federal Reserve's decision to lift short-term interest rates may have dampened enthusiasm for this previously lucrative sector.

The appetite for investment trusts is not surprising. Last year, investment trust shares rose by 46 per cent, or twice as fast as the FT- SE All Share Index, boosted by lively overseas markets but significantly by a narrowing of the shares' discount to underlying net assets from 12 per cent to 5 per cent.

There is a virtuous circle operating as private investors, eager for investment trust shares, mop up a relatively fixed supply held in institutional hands, stimulating trust share prices still further.

This can work painfully in the opposite direction when underlying values retreat, as investors should remember. The frothiness of the market is well illustrated by current issues such as the pounds 30m NM Smaller Australian Companies Trust, which is being sold at a 16 per cent premium to net assets. Is the trust's management really worth that much?