Investment Trusts

What are Investment Trusts?

The finance industry is full of jargon, so the following are some commonly used terms to describe the types of Investment Trusts that are available as pooled or collective investments.

An Investment Trust is a company with shares. It pools the money of several investors into a diversified portfolio of stocks and shares. Because the number of shares are fixed (unlike Open Ended Investment Companies or Unit Trusts where the number of shares available are variable), an investment trust is said to be a closed ended fund.

Another important distinction of investment trusts compared to open ended collective investment funds of OEIC’s and Unit Trusts is that they are allowed to borrow capital or financially gear to invest. Open ended investment funds cannot do this. 

Shares in an Investment Trust can be purchased as a single premium (lump sum) or on a regular premium basis.

The shares in an Investment Trust can be traded on the stock exchange or could be in an unquoted private company.

 What are the types of Investment Trusts?

Investments Trusts are a form of long term saving for the future. The Association of Investment Trust Companies (renamed to The Association of Investment Companies or AIC in October 2006) classifies investment trusts into 38 different sectors.

The capital structure of investment trusts are usually either:-

• Conventional: Ordinary Shares or Preference Shares or Warrants
• Split Capital: Split Capital Shares, Zero Dividend Preference Shares, Income Shares or Capital Shares

The legal structure of Investment Trusts means they are regulated by Company Law and not by The Financial Services and Markets Act 2000 (FSMA).

This means they can invest in almost an unlimited range of investments as permitted in the company’s Memorandum and Articles of Association and its Board approval.

Why should I invest in an Investment Trust?

The major reasons for recommending an investment trusts compared to open ended investments are that their investment managers can take a longer term view of what they invest in, and in more illiquid investments than open ended investments could because they will  not be forced sellers.

Additionally, investment trusts can provide higher levels of income than equivalent open ended investments because of the discount to Net Asset Value (NAV) allows the investment manager to buy more of the securities, and therefore a greater annual income.

Nevertheless, the price of investment trusts shares depends on two main factors:

• Value of the underlying assets or Net Asset Value (NAV)
• Open market or trading value of the shares

Also the risk/reward of investment trusts is influenced by the following:

• The amount of discounting of traded shares to the NAV
• Level of financial gearing of the investment trust

Income and gains from investment trusts are taxed in the same way as income and gains from other shares. This means non tax payers cannot reclaim the tax credit and higher rate tax payers have to pay an additional 22.5% in tax on the gross dividend.

However if the Investment Trust is held within an Individual Savings Account (ISA), all dividends and capital gains are tax free.

How do I invest in an Investment Trust?

The first and most important step after you have decided you may want to invest in an investment trust is to have a discussion with us to provide you with independent financial advice.

Once we have agreed what the most suitable type of investment trust is for your particular circumstances we make an application on your behalf to pay a single premium or regular contributions into a selected fund based on how much you can afford your personal tax situation and the amount of fund required at maturity, at the acceptable level of risk you are prepared to take to match your needs.

Want to know more?

Talk to one of our qualified financial advisers on 01553 777600 or e-mail us at enquiries@ringassociates.co.uk

Also you may want to read the articles and associated links from the Financial Services Authority by accessing the following website at http://www.moneymadeclear.fsa.gov.uk/products/investments/types_of_investments.html

and

http://www.moneymadeclear.fsa.gov.uk/products/investments/types/pooled/investment_trusts.html