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Investment trusts

These are listed companies whose business is to invest such that the gains/losses accrue directly to the owners of the company.

Since the investment trust shares are openly traded, that means that if you want to invest in an investment trust, you simply buy the shares in the market. These are closed ended funds and shares must be available for sale for an investor to buy. Shares cannot be created for example in the way that a unit trust can create units to satisfy demand.

In order to represent the value at any time, the price of the shares should represent their proportion of the underlying value of the investment. However, the value is dependent upon the supply and demand for shares from investors and will normally trade at a premium or a discount.

The underlying investments in an investment trust could be from a wide range, including equities, fixed interest investments and property. Be sure you understand the investment strategy of the investment trust, as this is what will determine how risky it is likely to be.

Background

Investment trusts began in the Victorian era when the only way to invest in shares was to buy directly. This made it very difficult and expensive for small investors to invest in shares on anything other than a speculative basis. Even today if you want to invest in shares directly, and want a broad spread of investments without paying too high a percentage in fees, you should be starting with at least £30,000 to £50,000.

Therefore, some investors got together and formed a company, whose purpose was not to conduct a normal business, but simply to act as an investment vehicle for them.

This history is important because it means that investment trusts have the powers of any other company conducting business. Most importantly, this includes the following: -

  • The power to borrow money
  • The power to issue different classes of share - see split capital investment trusts.

Investment Trusts - Summary

Investors have to trust their fund managers rather more than they do in a typical unit trust or insurance company controlled fund.

This is because the managers have more powers.

The rule should be to select the investment trust that suits your requirements, and then read everything you are subsequently sent in case the managers are telling you that they have done, or plan to do, something that will change the nature or strategy of the investment trust in ways that you do not wish to be part of.

When choosing an investment trust, be sure to understand its attitude towards gearing i.e. borrowing, along with its underlying investment strategy – i.e. sector and risk profile. These are the key factors that influence the risk level of the investment trust.

The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations), and investors might not get back the full amount invested. Past performance is not a guide to future performance.

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