Investment trusts provide a way to invest in the market as part of a collective of other investors with the expert aid of a fund manager who can select the best investment opportunities to include in the investment trusts with the aim of providing the trust participants with the best returns possible within the risk level of that trust.
Currently, the Association of Investment Companies (the trade body that represents investment trusts) lists over 420 investment trusts available on the stock market.
What are Investment Trusts?
Investment trusts involve the pooling together of funds, from several investors, in order to create a highly diversified and expertly managed collection of investments with exposure to a greater number of assets. They are publicly listed companies, meaning that anyone can buy into investment trusts, which invest in the shares of other companies or other financial assets.
As a publicly listed company, an investment trust will have a board of directors who are responsible for the supervision of the fund manager and the activities of the fund in line with the fund objectives.
How Does an Investment Trust Work?
Investment trusts are listed on a stock exchange, usually with details of what the trust consists of, its risk rating, and its historical returns, with the intention that investors looking for stability and diversification will buy into the trust. Due to the fact that an investment trust is a collective of shares, the performance of any single share can have less of an impact on the overall performance of the trust.
As there are a fixed number of shares available in investment trusts, it is possible that you will be unable to purchase investment trust shares in a trust that is already experiencing full allocation. Investors can buy and sell shares in an investment trust from as little as £25 either through a platform or directly from the trust manager themselves.
Are Investment Trusts a Good Investment?
When it comes to investing there are no guarantees and there is always a risk that your capital could go down as well as up. This is also true of investment trusts as their performance will reflect the market performance. They are also at the mercy of supply and demand, as should demand for the trust in question drop, the price of the shares you hold could also be much lower. That being said, investment trusts can be excellent for investors seeking income from their investment cash. Depending on the performance of the trust in question, investment trusts can receive dividends from companies whose shares are included in the trust as well as making interest on loans to entities such as governments and businesses included in the trust.
What is the Difference Between A Fund and an Investment Trust?
Both investment trusts and funds allow investors to pool their money with other investors to form a collective, however, whilst there are many similarities between an investment trust and a fund, there are some key differences that set them apart, which, as an investor, it is important to be aware of. Investment trusts are ‘closed -ended’ meaning there are a fixed number of shares that are purchased and sold between investors on an exchange such as the London Stock Exchange. Conversely, a fund is ‘open-ended’ meaning units are bought and sold directly from the fund managers and there are an unlimited number of units available.
What are Unit Trusts?
Unit Trusts also pool your money together with other investors in order to create a diversified fund. This is managed by a fund manager who uses the funds raised by the sale of units to invest in a variety of securities such as bonds, shares, or guilts. As an investor, you can make money in unit trusts by selling your units at a higher price than you originally bought them for. This price is referred to as the Net Asset Value (NAV) and the amount of units available is unlimited as more units are created in order to meet demand from investors.
The NAV will fluctuate in response to the value of the assets held within the unit trust. Due to the fact that the value of the units is based on changing offer prices and bid prices, investing in a unit trust is considered a long-term investment. Unit trusts also come with associated costs such as brokerage fees, annual management charges, and the initial charge. Investment in a unit trust is usually conducted through a broker, directly from the fund management company or through an independent financial adviser.
What is Net Asset Value (NAV)
Net asset value (NAV) refers to the value of an entity, calculated by subtracting the total value of the assets held within the entity, by the total value of its liabilities. The NAV will represent the market value of a unit or share of a fund, much like the stock price of a company, in order to give you an idea of the fund’s value. This can then be used to compare different investment funds and their performance. However, there are limitations as to how useful this metric can be when selecting a fund as funds will pay out almost all their income and capital gains to their shareholders. Another way to measure the performance of a fund is to scrutinise the fund’s total annual return.
The NAV can be a useful tool for prospective investors as if share prices are higher than the NAV they are considered to be trading at a ‘premium’ and if they are cheaper they are considered to be ‘discounted’.
What are Asset Classes?
Investment trusts will often specialise in a type of asset that they will hold within the trust. These are referred to as asset classes and can include:
- Equities and shares
- Government bonds
Often trust managers will have expertise in a certain asset class, giving investors confidence to purchase shares in that investment trust. Asset classes also give investors the opportunity to invest in line with their values and can include ESG (environment, social and Corporate Governance) principles.
What are the Advantages of Investing in an Investment Trust?
Due to the fact that within investment trusts, your money is invested in a variety of companies, investment trusts tend to offer a more stable investment environment. The other major advantage is that many investment trusts will pay dividends to their investors, although it is worth checking before purchasing shares in an investment trust. Whilst dividends are never guaranteed, they can provide an additional income.
The other advantage of investing in an investment trust is that as an investor, you can gain exposure to hundreds of stocks without the dealing fees that would soon erode any returns you might make. As an investor it is also time-consuming to keep track of all the companies that comprise a diversified portfolio, however with an investment trust this is done for you by the trust manager.
What is an Investment Trust Manager?
Often referred to as the fund manager, this is the person employed by the board of directors to manage the day-to-day running of the investment trust including what assets the investment trust is invested in and when to buy and sell those assets. The investment trust manager is paid for providing an investment strategy out of the trust’s assets. Whilst this does represent a cost to investors, the running costs of an investment trust are still fairly low at around 0.5% on average.
Are Investment Trusts Safe?
Whilst any type of investment comes with a degree of risk, many of the investment management firms that are employed by investment trusts are authorised and regulated by the Financial Conduct Authority. Investment trusts are also managed by investment trust managers who have years of experience and have conducted sufficient research into the assets contained within the trust.
Of course, it is still possible to lose money when investing in an investment trust. This is reliant on the investment trust performance and the share price of the units available within the trust. If in any doubt, investors should seek investment advice from a financial advisor.