A Quick Guide To Investing In Investment Trusts
The investment trust is one of the most common vehicles that both private and institutional
investors use to grow their portfolios, but for those who are yet to enter the market, the following is a brief introduction to what they are and how they can be accessed.
What is an Investment Trust
It is a collective investment vehicle which allows investors to pool their money and spread their investments across a number of underlying investments, fulfilling a role similar to that of fellow collective investment vehicles, Unit Trusts and Open Ended Investment Companies (OEICs). They can , therefore, offer lower risk profiles (than investing in single companies) alongside access to a greater range of investments than an individual could feasibly manage on their own (whilst offering focus on particular industrial and geographical sectors). Fund managers are employed to oversee the investment decisions and so investors benefit from their expertise in spotting investment potential and spreading risk.
In contrast with both Unit Trusts and OEICs however, each one is essentially a stand alone public limited company that is traded on a stock exchange and whose sole purpose is to invest in other public limited companies. As a result, they are closed ended in that a trust is divided into a finite number of shares which can be traded in the same way as other public limited companies shares. A buyer must buy existing shares from a seller and so the value of a particular trust is set by supply and demand, influenced in turn by the performance of the fund and its underlying investments (open ended funds, on the other hand, allow investors to add their money to a funds pot, increasing the fund size, in exchange for an allocation of units according to the value of each existing unit). The contrast between a trusts share price and its Net Asset Value (NAV) will therefore provide you with an indication as to how the fund is performing and how popular it is. Usually the shares trade at a price below the value of the fund (i.e., at a discount).
Ways to Invest
Investing Through Brokers - Investment trusts can be purchase through stock brokers in the same manners as equities/company shares etc or through fund brokers but these method will introduce a tier of charges even if they are easily offset by the performance of the fund.
ISAs - The stocks and share element of an ISA or a Junior ISA will often allow investment into investment trusts while some may tie themselves exclusively to one particular trust; using it to access the managed range of underlying equities.
Pensions & Annuities - Those pensions and annuities that are managed by pension fund managers are likely to be investing in underlying investment trusts. However, for those who want to pick and manage their own trusts within their pension pots, Self Invested Personal Pensions (SIPPs) or Small Self Administered Schemes (SSASs) offer the chance to get hands on.
Types of Investment Trust
Multi Manager Funds - These funds utilise more than one fund manager to oversee different sectors into which the fund invests. They present another way to both spread the risk and benefit from fund manger expertise. Fund managers specialising in specific company sectors can manage their individual sectors more closely, potentially more successfully, whilst risk is diluted as performance in one area of the fund is more likely to be offset by another being run on a differing strategy.
Split Capital Investment Trusts - These are usually fixed term trusts which offer variety of share types depending on whether you want to protect your initial investment capital and/or receive dividends and/or qualify for high yields if the fund performs well. Come the wind-up date, those shares with protected capital (but low yield) will be paid out on before those that offset that risk with the potential of high yields.
Real Estate Investment Trusts (REITs) - Essentially investments trusts which invest in underlying property investments rather than stocks and shares. Again these are separate company entities that can be traded on the stock exchange.
For anyone looking to invest in
investment trusts, especially those with no previous experience, it is always prudent to seek independent professional advice before doing so, but their certainly is value in adding these options to your portfolio.
by: Stuart Mitchell
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