130 years old and still paying their way

INVESTMENT TRUSTS: they may have lost their way recently but these pooled funds have a proud history of strong long-term performance.

The history of investment trusts dates back to the 1860s when a group of worthies formed a British company to invest in debts - called bonds - of the United States and various colonies. In 1868 this became the Foreign & Colonial Investment Trust, which today has investments ("net assets") worth over pounds 1.8bn and is just one out of some 400 investment trusts to choose from.

Investment trusts can invest in virtually anything, including companies whose shares are not listed on any stock exchange, and property. Some invest in a broad portfolio of shares. Others are more specialist, investing in commodities, smaller companies, emerging markets or single countries. Some, "split-capital" funds, allow investors to buy shares which will receive either all the income earned by the fund or all the capital growth.

Investment trusts can borrow money if the interest rates are attractive and they can make a good return on the money borrowed; something unit trusts are not allowed to do.

Most investment trusts, whether specialist or not, carry higher risks than similar unit trusts - largely because their share price is determined by supply and demand in the stock market. If demand is low, the share price can fall below the trust's net asset value - that is the total value of its investments divided by the number of shares in issue. This is called a discount. Today the discount is around 12 per cent which means that an investor can in effect buy pounds 1 worth of assets for 88p.

Over the years, investment trusts have not marketed themselves as well as their competitors. Many potential investors may have been put off because, until relatively recently, many trusts could be purchased only through a stockbroker. However, with their long history of successful fund management and lower charges, typically below 0.5 per cent a year, investment trusts should be considered by anyone thinking seriously about long-term investment.

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