A great number of people are beginning to learn more about the possibility of shares in investment trusts after they remained relatively underused for a number of years. However, in comparison with unit trusts and Oeics, they remain largely little-known. An investment trust is a company, quoted on the stock exchange, whose business is holding shares in other firms. If shares in those companies do well, then the trust does well and vice versa. The point is that a trust reduces the risks: one of the companies it holds might go bust but it's very unlikely that hundreds will.
Investment Trusts have been, historically, less popular than other investments.
One of the most commonly cited reasons why they are not more well known is that financial advisors are not paid a commission for recommending them. Although independent financial advisors are duty bound to offer their clients the best advice, there tends to be a habit of suggesting alternatives for which the receive both intial and annual commissions.
What are the options?
There are hundreds of investment trusts with combined assets of tens of billions of pounds available. These vary from global funds that spread money across several stock markets to those that invest in just one region, such as the UK or the Far East. They have been around since the Victorian era, with Foreign and Colonial the first one to be formed in 1868.
They were created to give smaller investors access to the new stock markets of the USA and were also used to bankroll expansion (such as railway lines) in the New World, hence names such as Foreign and Colonial. Investment trusts were set up to provide modest investors with the same sort of opportunities as wealthier investors.
It also offered them the chance to invest in a large number of UK and international shares and it is still performing the same function today.
People can buy the shares in the same way as they would an investment in a normal company, by contacting a stockbroker. Alternatively, it is possible to approach the fund management group that runs the scheme.Most of the larger investment trusts allow you to invest regular amounts or lump sums via an Isa.
The variety of investment trusts is similar to unit trusts, with some investing in the UK, others in the Far East, in smaller companies, or in Europe. But some of the most useful trusts may be the so-called international general trusts, such as Foreign and Colonial, Scottish Mortgage, Alliance Trust, Bankers or Witan. These are very large trusts - Foreign and Colonial is often ranked in the FTSE 100 index of Britain's largest companies - and they invest across all the world's major stock markets. This means people do not need to create a portfolio of different investment trusts for special objectives, as you often need to do with unit trusts. This makes them a good option for both novice and experienced investors. Although they are arguably not the most exciting stock market investments they are the sort that people can buy and then largely forget about for ten years.
Advantages & disadvantages
In some ways investment trusts are much like unit trusts and Oeics, however, there are several key differences. Perhaps one of the main things to keep in mind is that the price of an investment trust share does not just depend on the value of the shares in other companies which it holds. Rather, it is also impacted by the demand for the trust shares themselves. This makes investment trusts riskier than unit trusts, but on the plus side they are potentially more rewarding as well.
In most ways investment trusts are just like any other listed company, in that people buy and sell them for a quoted price via a broker and some pay dividends. However, there are some extra terms people should be aware of such as The Net Asset Value (NAV) of an investment trust. This is the value of all its investments, and provides an indication of what the trust would be worth if it were closed today and all its assets sold off.
Another thing to know is the premium or discount to the NAV expresses as a percentage how the share price compares to the NAV. For example, if a person purchases an investment trust at a 10 per cent discount, they are buying £1 worth of assets for 90 pence. If demand for the trust's shares should rise, then this discount could close, giving the investor an extra boost. However, if the popularity of the investment trust shares take a tumble then the gap could widen. In a falling market, people can be hit twice, as asset prices fall and their loss is made worse by a widening of the discount. To combat this investment trusts can buy back their own shares to reduce the supply. This means investing institutions, which often have investment trust shares they don't really want, can sell, while new private buyers take up the shares.
One difference they have to unit trusts is they are very cheap to buy. People are also not required to pay commission to middleman and therefore there is no need for five to six per cent of an investment to be lost in up-front feeds, as is the case with unit trusts. Buying charges are often as low as 0.5 per cent, or even a flat fee of around £10. People may, however, need to pay a small annual fee of around £25 or more for an Isa wrapper for your fund. A lump sum can be invested on a monthly basis. Monthly schemes are generally called savings schemes, or sometimes share plans or investment plans. They are normally offered by investment trust management companies. Special private investor schemes which bundle orders from small investors together are common, which makes these very low charges possible. Minimum contributions are generally low - around £20-£50 a month.
Keeping track
Those who want to check the price of their investment trust shares will find them listed under 'investment companies' in the share price pages in the business section of newspapers, such as the Financial Times, The Times and The Daily Telegraph, or online at www.Trustnet.com or www.Hemscott.com. And those who want to find out the performance of their trusts and how they compare with other trusts of the same type, various magazines are available such as Investment Trusts Magazine, while online sources include www.theAIC.com and www.Trustnet.com.
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Author: KYM Editor
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