Description

Existed since 1868.  Investment Trust companies (usually abbreviated to "Investment Trusts") are companies listed on the Stock Exchange, which invest in the shares of other companies. By investing into Investment Trusts, an investor is purchasing a broadly based, professionally managed equity portfolio.

Examples of Use

Small or large investors seeking a professionally managed spread of investments or seeking to invest in specific sector, specific share types or geographic region. Different types of trust and different classes of share are available for different financial planning needs.

Advantages

• Investment risk is reduced by utilising a broad spread of individual holdings.
• Useful means of investing in individual market sectors/overseas securities where specialist knowledge provided by managers.
• Professional managers handle investment management.
• Charges are generally lower than Unit Trusts/OEICS.
• Discounts, where the share price is less than the Net Asset Value  of the Trusts investments, presents a value buying opportunity not available with other collective investments. A discount, which decreases or "narrows", will enhance the performance of a Trust.
• Gearing (The managers borrow money to invest- in the belief that the profit made will be greater than the interest paid).  In a successful trust this can boost the value of the holding.
• Investment Trusts are "closed-end funds" (fixed amount of shares in issue) which means that the fund manager is not forced to buy and sell shares according to demand, unlike their open-ended counterparts (Unit Trusts/OEICs).
• Premium, where the share price is more than the Net Asset Value of the Trust’s investments.  This is rare but occurs where there is a particularly high demand for the Trust. It is also often a consequence of the closed ended nature of the Trust which creates a supply and demand imbalance.
• Net Asset Value (NAV) usually represents  the value of one unit of a fund. It is the fund’s assets minus its liabilities divided by the number of shares issued.  It is generally calculated on a daily basis.

For a close ended fund, such as an Investment Trust, the market price may vary significantly from the Net Asset Value resulting in a market price which is at a premium or discount to the Net Asset Value.

• There are an increasing number of monthly regular savings plans available many linked to Individual Savings Accounts (ISAs). Several fund managers now also run Pension plans.
• Many Investment Trust companies have schemes to enable investors to purchase shares inexpensively.
  Investment Trusts, as with other shares, can also be dealt with through stockbrokers.

Disadvantages

• Gearing in an unsuccessful trust can result in a substantial loss in value.
• Discounts can "widen", decreasing the performance of a Trust.
• The discount and the ability to gear means that share price performance can be more volatile than Unit Trusts/OEICs.  

Points of Interest

• Investment Trusts can specialise in certain hybrid shares, for example, Zero Dividend Preference shares, which should be apparent in the Trust details.  Professional advice should be taken to determine whether this type of investment is appropriate.
• Investment Trusts are not as widely known as Unit Trusts/OEICs due to marketing restrictions, but their company structure makes them easily accessible to the private investor.
• Pound cost average is obtained by investing using monthly savings plans and this can counteract the volatility of the market.  This is achieved by enabling an investor to buy more shares when prices are low and fewer shares when prices are high.
• Gains on the sale of Trust shares by an investor are subject to Capital Gains Tax.
• Dividends are subject to Income Tax.