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Investment Trusts

INVESTMENT TRUST GUIDE: Investment trusts are often a low cost, low risk, way of investing in shares and bonds.

 

INVESTMENT TRUST GUIDE: Investment trusts are a low cost, low risk, way of investing in shares and bonds. Here we look at how to select and buy investment trusts for savings or your pension. Investment trusts, often described as 'the best kept secret in the City', are massively overshadowed by the greater publicity given to unit trusts.

So we compare investment trusts and unit trusts before going on to look at different types of investment trust. Charges on investment trusts can be very low and we look at where best to buy them.

But there are pitfalls – investments can trade at big discounts to net asset values and split investment trusts have sometimes done badly. This guide is designed to help you understand and choose the best investment trust.

For investors willing to put in a little time getting to understand them and their quirks, investment trusts can make for a more successful long-term investment than unit trusts. This long-termist slant makes them particularly suitable for pension and retirement planning.

WHAT IS AN INVESTMENT TRUST?

An investment trust is a listed company and issues shares in the same way as ordinary companies like Marks & Spencer or BT. However, rather than manufacture widgets or provide services to customers investment trusts exist specifically to operate pooled funds for investors.

A professional fund manager, who decides which companies and which countries to invest the fund's pooled money into manages the trust on behalf of investors. Like unit trusts, by pooling their funds, investment trust shareholders benefit from economies of scale on dealing costs and (hopefully) from their fund manager's superior knowledge of investments.

They also benefit from diversification as the trust offers exposure to a large number of companies (typically 50 plus) that they could not afford to invest in themselves. This reduces the impact of a poor investment decision on the overall value of their investment.

In addition to conventional investment trusts, which issue one class of share, there are also split capital investment trusts which issue two or more share classes. Each class of share is designed to appeal to different investors, offering varying combinations of income and/or capital growth. For more information on splits read the separate guide in this section.

THE ADVANTAGE OF CLOSED INVESTMENT TRUSTS

Investment trusts are 'closed end funds', as a set number of shares are issued when they launch and this number basically remains constant. By contrast, unit trusts can issue new units or cancel them dependent on whether demand is higher than supply or vice versa. Being closed ended means investment trusts do not need to sell investments to meet redemptions from private investors so the managers can take longer-term positions in stocks that are less liquid than unit trust managers typically can. To be an investment trust the fund must be a based in mainland Britain. However, recently new funds have been launched which are effectively investment trusts in all but name. This is because while they have the same structure as investment trusts the fund is 'domiciled' or legally based outside of mainland Britain, normally in the Channel Islands. These funds will normally have shares that are traded in London so can be bought as if they were investment trusts, but with some added tax advantages.

UNIT TRUSTS VERSUS INVESTMENT TRUSTS

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1 comment so far. Why not have your say?

colin henry

Sep 14, 2010 at 16:18

Clear, simple and concise; just what I wanted. Thanks

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The Citywire Guide to Investment Trusts


In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

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