Investment trust

Investment trusts are a form of investment where investors’ money is pooled together alongside other investors in order to benefit from the advantages of working as part of a group. Investors delegate responsibility to a professional fund manager to invest in a range of stocks, shares and securities in a wider range of companies than most people could practically invest in themselves which also spreads the risk. But this doesn't mean there is no risk to your capital and the risk will vary depending on where the trust invests.

The first investment trust was the Foreign and Colonial Investment Trust, launched in London in 1868 "to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks"

Investment trusts are mainly found in the United Kingdom and are traded on the London Stock Exchange, like other public companies but rather than manufacture or sell something, its job is to invest in other companies, if these investments are profitable it returns the proceeds to the shareholders. As a quoted company, the share price of an investment trust is determined by the supply and demand for its shares on the stock market. Like any company quoted on the stock exchange, investment trusts have to publish an annual report and audited accounts. They also have an independent board of directors who are accountable and responsible for looking after the shareholders interests.

Investment trusts issue a fixed number of shares when set up, which means managers always have a fixed amount of money at their disposal and won't have to buy and sell to meet demand for shares. This can add a degree of stability to the trust.

Typically, investment trusts trade at a discount this can be an advantage to investors looking to buy as you pay less than £1 for £1 worth of assets - this is said to be trading at a discount. If you buy units for more than the underlying value of the fund this is said to be trading at a "premium". Strong demand for shares will ordinarily push up prices so the value of your units should rise but because there is a fixed supply of shares and a fluctuating demand, there can be a mismatch between the price the shares trade at and the value of the assets held by the trust.

Conventional investment trusts tend to issue just one type of share. These offer income through dividends and the chance of capital growth. Most also offer ISA plans, for investors.

Investment trusts appeal because they generally have the advantage of charging lower fees around 0.6% as opposed to 1.5% of a unit trust. Consequently there is more to invest in the fund, so boosting overall performance which means the potential for higher returns. So why aren't they as widely bought as unit trusts. The fact is they don´t pay commission to advisers, so tend not to make it on to "best-buy" lists. But, following rules which now effectively ban investment advisers from taking commission this looks set to change.

date added: 21/03/2013

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