A description of investment trusts, their benefits and features.
Anyone can choose to invest through an investment trust - whether they are onshore or offshore. This article aims to explain what these investment vehicles are and to highlight some of the features and benefits of investing in this way.
If you think you might be interested in this method of investing it is always wise to make your decision from an informed position. This article is only meant as an introduction to the theme; a good independent financial adviser should be able to offer you further information and advice.
It is an independent financial adviser’s job to offer you impartial ‘best’ advice about which financial product or products suit your own personal circumstances.
What are investment trusts?
Contrary to what some people think, investment trusts are not an investment vehicle offered by a financial services company - they are companies in their own right, responsible for investing in the shares of other companies on behalf of their investors.
If you invest in an investment trust, your money is pooled together with the money of the other investors and managed by the trusts’ professional fund managers. These fund managers are employed to invest the pooled money into the shares of other companies - the range of companies available to the fund manager is realistically far wider than the range available to a single investor - so a single investor in an investment trust can benefit through gaining exposure to a diversified and professionally run portfolio of shares that spreads the risk of stock market investment for any investor.
Currently there are over 300 investment trusts and they are responsible for the management of billions of pounds’ worth of assets on behalf of their investors.
Features and benefits.
1) Investment trusts are companies in their own right with independent boards of directors whose duty it is to look after the interests of the shareholders.
The shareholders are the investors in the company - namely you or I! And as the directors are directly answerable to the investors, they have a certain amount of control or ‘power’ over the way the company is run and may, if they wish, challenge actions and decisions of the directors if they feel they go against their best interests. This means the investors have far more say and a greater feeling of security when it comes to their investments.
2) Investment trusts are what are known as ‘close-ended’. This means that when one is created a fixed number of shares are issued, and through the sale of these shares the investment capital is raised. As the number of shares issued is fixed, so the amount of money available for investment is fixed - this allows the fund managers to plan effectively from the outset.
3) As investment trusts are companies in their own right they can actually borrow money to increase their purchasing capacity allowing them to purchase additional investments if they feel it advantageous without having to sell any existing investments.
This process is called “financial gearing” - the idea is to make enough of a return on the additionally financed investment to be able to pay the interest on the loan, repay the loan and make a profit on top! The more a trust borrows obviously the greater the potential returns - though at a higher risk.
Not all investment trusts use financial gearing and whether gearing is the right decision for a trust at any given time is a decision taken by the fund managers together with the board of directors.
If an investment trust does gear up they can often borrow at far lower rates of interest than an individual or other kinds of company could, as any borrowing is secured on the trust’s portfolio - this makes the trust a good credit risk and so interest rates are likely to be lower.
4) Split capital investment trusts, which are a particular type of investment trust, can issue different types of shares to different types of investor depending on their particular needs.
For example, some share types aim to pay dividends to those investors interested in receiving an income, other share types aim to pay out capital only at the end of the trust’s life. The different types of shares have different types and levels of risk associated with them.
5) If you become an investor in an investment trust: -
a) your money has far greater purchasing power than if you alone were to invest directly in the stock market - because your money is pooled together with all the other investors’ money, thus providing you with far greater potential economies of scale and purchasing power…
b) you have access to a far more diverse portfolio of shares than your money alone could necessarily purchase - because by buying shares in only one investment trust you effectively buy yourself a diversified portfolio of shares as each investment trust invests in many different companies…
c) you effectively spread the risk of investing full stop - because you’re not dependent on the success of just one or two companies as your investment is spread across many companies.
6) Your money often goes far further with an investment trust and starts being invested from the start of your investment period. This is due to the fact that investment trusts generally demand far lower internal charges than many other investment vehicle or financial services company. This comes down to the fact that they have far lower marketing costs as they do not have to sell new share issues, and the shareholders (the investors) demand that the independent board of directors ensures that the fund’s internal charges are realistic.
If you add to this fact the fact that you can invest relatively small amounts of money into an investment trust - for example, just £25 a month or a one of investment of £250 - you can see that investment trusts are an accessible and realistic way for many people to have the benefits of potential stock market returns with a limited amount of personal exposure.
