Investment Trusts

Investment trusts are public limited companies, which invest in the shares of other companies to make profits for their own shareholders.

Originally, investment trusts were the preserve of institutional rather than private investors because the Companies Acts forbade the companies from advertising their shares:

In recent years, some investment trusts have advertised their services and started regular savings schemes for as little as £25 per month to build up investment trust shareholdings with the help of pound cost averaging.
As a result, private investors arc more aware of their existence and are buying more of their shares.
Savings schemes enable such investors to buy shares direct from the company as opposed to the normal method of purchase through stock market firms.
Some unit trust and OEIC companies have set up specialist funds investing in investment trusts.
Some financial advisers with the appropriate level of authorization recommend arid run portfolios of investment trusts.

Like other public company shareholders, investment trust shareholders have the right to a vote at shareholder meetings, receive dividends and receive a share of the capital when the trust is wound up.

The capital subscribed by the ordinary shareholders is used to create a large investment fund managed by investment experts. The Memorandum of Association of an investment trust is often so widely drawn that general investment trusts have the power to invest in almost every form of investment worldwide. Today, investment trust companies also offer a range of specialist sector funds invested in UK blue chips, emerging markets, Europe, America or specific industries such as mining or technology.

Like every other public company, an investment trust has the power to borrow additional capital through the issue of secured and unsecured loan stock. These borrowings are used to buy additional investments for the fund.

A trust with a high level of borrowing relative to its share capital is said to be highly geared:

A highly geared fund produces exceptional returns in rising stock markets since all profits above the interest on the loan are available to shareholders.
Equally, it can produce poor results in a falling stock market because full loan interest has to be paid even when profits are low.

Investment trusts are a form of pooled investment:

The funds subscribed by shareholders are pooled to form a large fund, capable of providing investments in a wide spread of companies in order to reduce risk, and to reduce dealing costs by bulk buying.
In addition to charging dealing costs to the fund, investment trust managers also charge an annual management fee equivalent to 0.3-0.5% of the value of the fund.

All investment trust shares are bought and sold on the stock market. Their bid and offer prices depend on market demand arid the market price can be, and often is, less than the net asset value of each share:

When this happens, the shares are said to be trading at a discount to net asset value.
Occasionally, the share price can rise above the net asset value of the share. The shares are then said to be trading at a premium to net asset value.
In simple terms, net asset value is the market value of all the assets in the fund divided by the number of shares on issue.

When asset values fall, share prices fall. The difference between the closed-ended investment trust when compared to the open-ended OEIC is that the former does not have to sell assets to pay shareholders who want to cash their investment. Shareholders sell their shares in the market for the best price they can get.

Investment trusts are higher risk investments than unit trusts. OEICs or ICVCs due to the manner in which the market price can fluctuate in relation to their underlying asset value, making them more volatile.

Investment trusts can make new issues of shares. Sometimes, subscribers to new issues are given free warrants to subscribe for additional shares at a fixed price in future. If the share price rises above the fixed price, the warrants provide the investor with additional profit.

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