Investment Trusts

Investment trusts invest in the shares of different companies, allowing investors to spread their risk.

The main difference from unit trusts is that investment trusts are themselves companies in which you buy shares. So you’re investing directly, rather than indirectly through an open-ended fund.

Because investment trust share prices are affected in part by supply and demand, their value can fluctuate more often than units in unit trusts.

As with unit trusts, investment trusts differ in the kinds of companies they invest in – some being more ‘high risk’ than others. Some focus on capital growth with very little income from dividends, and others invest for a steady income from dividends with some chance of capital growth.

Individual private investors rarely have the capital available to enable them to obtain a broad spread of investment risk in their portfolio by investing directly into stocks and shares.  Investment trusts enable private investors to pool their capital, or regular savings, with others in order to obtain a broad spread of risk and consequently a more balanced portfolio.

An investment trust is in fact a company, quoted on the London stock exchange, whose business is that of investing other people’s money.  Investment trusts, like unit trusts and open ended investment companies (OEICs) will have specific objectives, for example, capital growth or provision of a regular income and they will achieve this in a specific way, for example, investing in the UK or Europe, in shares, fixed interest securities or property or a combination of any of the above.  This means that a “UK Growth Fund Plc” investment trust will invest in UK based shares in order to achieve capital growth for its investors.

An investment trust can be bought and sold like any other stock or share, ie, through a share dealing service or, many investment trusts now run specific savings schemes for those who wish to invest on a regular monthly basis.

There are various differences between an investment and unit trusts:-

• An investment trust has a finite number of shares whereas a unit trust will create units to meet demand and as such is open ended.
• The value of an investment trust will depend to a greater extent upon supply and demand, ie, as there are only a specific number of shares issued, if demand outstrips supply, then the value of the shares will rise.
• The value of a unit trust will directly reflect the value of the underlying shares.  This is unlikely to be the case with an investment trust where, as the value is dependent upon supply and demand, it could be trading at a premium or a discount to the value of the underlying assets.  Trading at a discount can have an advantage as you are obtaining exposure to those underlying assets at a lower cost than if you were investing in them directly.  In addition to this, income yields tend to be slightly higher as the income is based on the value of the underlying assets and not the value of the investment trust.
• The initial and annual management costs of buying and selling investment trusts is generally less than those of unit trusts.
• Lastly, investment trusts, as companies, are able to borrow in order to invest.  This “gearing” can have the effect of increasing investment returns in a rising market as the returns achieved are in excess of the repayments made in respect of the borrowing.  Conversely, in a falling market, gearing can cause more volatile returns.

It is important to research the market carefully when considering this type of investment and you may be wise to consult a suitably qualified and experienced financial adviser.