Personal finance: The benefit of pooling your resources in a trust
Understanding the stock market
Saturday 24 January 1998
An investment trust is, in fact, a limited company whose shares are quoted on the stock market. They came into being in the last century as a means of raising capital for pioneering investment overseas. Over the years their investment outlook has changed and today they concentrate on forming portfolios of shares quoted on the world's stock markets.
By comparison, unit trusts are relative newcomers. The first one was launched in 1931 to offer investors an "instant portfolio" of shares. The concept is simple. Investors' funds are pooled and divided into a number of units in proportion to their investments. The investments are held in the name of an independent trustee (hence their name).
Units in an unit trust are bought and sold by the unit trust company's managers, at a price which is extremely close to the value of the shares represented by the units. On the other hand, the price of a share in an investment trust is determined by its supply and demand on the stock market. Consequently, its price may bear little relationship to the net asset value (NAV) that it represents. Investment trust shares on average are currently selling around 15 per cent below their NAV.
There are many explanations as to why investment trusts sell at a discount. These range from the view that there is an over-supply, to the opinion that it reflects the cost of selling the portfolio. Given all the variables that determine the price of a trust's shares - supply and demand; management expertise and the view of the market in which the trust invests - it is not surprising that NAVs and prices do not coincide.
It will come as no surprise to learn that for many years a fierce battle has been raging between the proponents of unit trusts and investment trusts. The Association of Unit Trust and Investment Funds' view is that as the prices of investment trusts are determined by market forces, they are riskier than unit trusts.
On the other hand, the Association of Investment Trust Companies (AITC) emphasises that as investment trusts generally sell at a discount to the NAVs, investors obtain more shares for their money. They also point out that the charges are less than an unit trust's. Furthermore, whereas an unit-trust manager has to sell the underlying shares when unitholders want to cash in their units, an investment trust does not and, therefore, can take a longer-term investment strategy compared to an unit-trust manager.
Over the last 20 to 30 years, investment trust discounts have been in the 4 to 25 per cent range. As opposed to being a "problem" in a fundamental sense, it can, in fact, be a worthwhile advantage to investors. A smart and active investor can make money by buying at a relatively wide discount, selling when the discount has reached its narrowest for the current cycle and reinvesting in the same trust when he judges that its discount has gone as far out as it is going to go. In fact, the discount can be rather like an everlasting escalator - if you are prepared to back your judgement and to monitor your shares carefully.
If you are a long-term investor looking to build-up capital, it is well worth considering an investment trust for either a lump sum investment or regular savings plan. The golden rules are:
Do not chose a trust for its discount - make sure that you like the trust's policy, its performance and its management.
Do not sell shares just because the discount has narrowed - the change may reflect improved quality in the trust and you may do far better to hang on for an even better performance.
Look at the assets. The discount tells you how much the market undervalues the company's assets. If there is a big discount to a portfolio of good quality listed shares, you could be on to a winner - though rest assured, you are unlikely to be alone in your discovery. On the other hand, if the discount is because of the poor quality of the portfolio, the shares could seriously damage your wealth.
Finally, do not demonise the discount. Except for the minority of active investors who are looking to trade on discount movement, the trust's share price, total return and asset growth are more important.
For an introduction pack to investment trusts and performance information, telephone AITC on 0171-431 5222.
Simon Read: "Pension freedom is months away but if we don't act soon, the freedom may be to make an expensive mistake with our future"
30 January 2015 11:00 PM
The introduction of the new pension freedoms has been "alarmingly chaotic", reckons Nigel Green, chief executive of the financial consultancy deVere Group, He said this week: "The implementation of changes appears to be being rushed in a cynical attempt to woo older voters ahead of May's election."
30 January 2015 09:24 AM
There has been continued criticism of banks' delaying tactics and failure to find those affected by by the UK’s biggest-ever financial mis-selling scandal
26 January 2015 03:29 PM
Companies will be required to ask about health and lifestyle choices or marital status, to protect consumers who do not take up the government’s offer of the Pension Wise guidance guarantee service
23 January 2015 08:00 PM
I had dinner with the pensions minister Steve Webb this week. There was a wide-ranging discussion about the new pensions freedoms starting in April, and changes to the state pension. Crucially, I also got to ask Mr Webb whether he had any plans to have another look at the injustice that is frozen pensions.
23 January 2015 08:00 PM
23 January 2015 08:00 PM
While the health of the economy is not insignificant, Mark Dampier finds it incredibly unpredictable in terms of its impact on the stock market
21 January 2015 12:32 PM
A new free app is aimed at the three-fifths of Brits who have never switched supplier
20 January 2015 09:34 AM
Regulator’s investigation into the market found that around £160bn was held in easy access savings accounts that pay interest lower or equal to BoE base rate
17 January 2015 12:00 AM
Simon Read: Information is power. And it's in the wrong hands when people are cold-called by companies that know they're in debt
17 January 2015 12:00 AM
In debt? You're likely to be targeted by unscrupulous companies that hope to profit from your misfortune. They may try to pretend to be your friend by offering what they call "help" – but almost certainly that help will come with a cost and leave you worse off than you were before they got in touch.
17 January 2015 12:00 AM
In less than three months' time radical changes to pensions will take effect, providing investors with more freedom. Yet for those who prefer to make their own investment decisions, the choice of funds available is overwhelming. And an income drawdown account is also not particularly easy to manage.
15 January 2015 12:23 PM
The minimum amount for which you can be forced into bankruptcy is being raised from £750 to £5,000
Derek Pain: I'm cautious, but remain one of the few bulls in the market
Donald MacInnes: Who would want to be a Barbie girl in a non-Barbie world?
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
- 1 Venezuela Expo Tattoo 2015: Extreme body art from 'Vampire Woman' to 109mm earlobes
- 3 Ball pool for adults opens in London
- 4 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
- 5 Rashida Jones speaks out against male-centric porn saying 'women should have sex and feel good about it'
9 reasons Greece's experiment with the radical left is doomed to failure
Stephen Fry explains what he would say if he was 'confronted by God'
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion