Back in the spotlight after all these years

Unit trusts may have captured the popular imagination; but big brother, the investment trust, is back in business.

Thanks to a £17-million advertising campaign, investment trusts are emerging from the shadows. For years, smaller investors have tended to neglect investment trusts in favour of their higher-profile counterparts - unit trusts.

Thanks to a £17-million advertising campaign, investment trusts are emerging from the shadows. For years, smaller investors have tended to neglect investment trusts in favour of their higher-profile counterparts - unit trusts.

Investment trusts and unit trusts, such as open-ended investment companies and pension funds, are all collective investments. They are based on a fund of stocks and shares, run by a manager, which individual investors can buy into. The great advantage of any collective investment is that it allows you to spread your risk across possibly hundreds of shares for a relatively small amount of money.

Although less well known than unit trusts, investment trusts came along first. The Foreign & Colonial Investment Trust was launched in 1868 as the world's first collective investment vehicle, while the first unit trusts started in 1932.

While both vehicles are collective investments, they have very different rules. Investment trusts are incorporated as public companies. They issue shares and are "closed-end" funds. That is, they do not increase the number of shares in issue. Unit trusts on the other hand expand according to demand for their units.

How have unit trusts managed to steal the limelight from investment trusts? Daniel Godfrey, director general of the Association of Investment Trust Companies (AITC), says this is due to the dynamics of the two types of investment vehicle. Unit trusts make a profit for their fund managers, so they want more investors because this makes them grow, producing more profit.

Investment trusts exist to make a profit for shareholders by successfully investing their assets. So there is no need to attract new shareholders.

With the aim of introducing 75 per cent of UK adults to investment trusts over the next five years, the AITC has launched its advertising campaign with a £17-million budget this year.

The traditional customer base for investment trusts has been institutional investors, says Mr Godfrey. But mergers between life insurance companies have created new companies large enough to do their own investing and therefore less reliant on investment trusts, he says.

However, as the old-style welfare state system continues to recede, people increasingly need investment vehicles to provide for their retirement years. "There is plenty of evidence to suggest that investment trusts do this very well," Mr Godfrey says.

Because shares in investment trusts are traded securities, they can go up and down in value according to market conditions. They are not firmly tied to the value of the assets held by the trust, as is the case for unit trust units.

So they can trade at a discount or a premium to the net asset value of the investment trust. This makes the shares more volatile than unit trusts as investments, but also increases the potential gains. This dwindling demand for investment trusts has led to most of their shares trading at a substantial discount.

It is this discount, or premium in some cases, which makes investment trusts appear complicated to many smaller investors. "Unit trusts are simple to understand: whatever the value of the assets is, divide it by the number of units, and that is their price," says Alastair Conway of independent financial advisers Clark Conway.

But closed-end funds may enable fund managers to invest more effectively. James Dalby of independent financial advisers Bates Investment Services says: "It is easier for a fund manager to invest when he knows what his pot of money is, some unit trusts have been flooded with money, and it can be hard to invest that money in the market."

But you can use discounts to your advantage, by picking one that is well-managed but temporarily out of favour for some reason. You may then be able to benefit from a subsequent closing of that discount, as well as an increase in the value of the underlying assets.

However, this will not necessarily happen. Mr Conway says: "There is nothing to say that a discount gap won't widen over the life of the trust."

When choosing an investment trust, you should take the discount or premium to net asset value into account, but pay more attention to the performance of the underlying investments, he says. The trust could be trading at a premium simply because effective recent marketing has temporarily stimulated interest in the trust.

Investment trusts can borrow money to invest, but unit trusts cannot. This means they can magnify gains by borrowing at a certain rate of interest, and investing that money in shares which produce a higher return. Of course, this ability to become geared brings with it a greater risk too.

Unlike unit trusts, investment trust have no restrictions on how they invest. They can hold property as an investment, for example, and also buy shares in unlisted companies. Again, riskier, but can mean higher returns.

"Investment trusts tend to work very well when you start dividing the shares up in a split capital investment trust," says Mr Conway.

Split capital investment trusts invest in the same way as any other investment trust, but they issue several different types of share. This allows investors to choose precisely the type of return and level of risk they want. The most common types are capital shares, which assume the capital growth of a trust not allocated to other shares, and income shares which take on the dividends of all the shares.

Other types include zero dividend preference shares. They pay no dividend but are instead entitled to a fixed return when the trust is wound up. They are low risk because they have first call on the trust's money at the end. Capital shares, on the other hand, are the most risky because they're last in the pecking order.

Shares in investment trusts can be bought through a stockbroker, or directly from the management group. Most investment trusts accept regular savings and their shares can be held in an Individual Savings Account, which keeps them largely capital gains an income tax free.

Mr Dalby recommends the Fleming Claverhouse investment trust, which has produced a return of 142.53 per ent over the past five years, well above the average for trusts in the UK general sector of 86.40 per cent, according to financial data provider Moneyfacts.

In the UK income growth sector, he recommends Merchants Investment Trust, where the five-year return has been 85.40 per cent, also above sector average.

AITC: 0171 431 5222, www.itsonline.co.uk

Bates Investment Services: 0113 2955955

Clark Conway: 0181 241 1000

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Sport
Robin van Persie leaves the field at the King Power Stadium last Sunday
football
News
In this photo illustration, the Twitter logo and hashtag '#Ring!' is displayed on a mobile device as the company announced its initial public offering and debut on the New York Stock Exchange on November 7, 2013 in London, England. Twitter went public on the NYSE opening at USD 26 per share, valuing the company's worth at an estimated USD 18 billion.
news

Arts and Entertainment
tvPresenter back after daughter's Halloween accident
Arts and Entertainment
Martin Freeman and Benedict Cumberbatch as John Watson and Sherlock Holmes in Sherlock
tv

Co-creator Mark Gatiss dropped some very intriguing hints ahead of the BBC drama's return next year

Arts and Entertainment
music Band accidentally drops four-letter description at concert
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

    Reach Volunteering: Charity Treasurer

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

    SThree: Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

    Ampersand Consulting LLP: Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    US immigration: President Obama ready to press ahead with long-promised plan to overhaul 'broken system' - but will it get past a Republican-controlled Congress?

    Immigration: Obama's final frontier

    The President is ready to press ahead with the long-promised plan to overhaul America's 'broken system' - but will it get past a Republican-controlled Congress?
    Bill Cosby rape allegations explained: Why are these allegations coming out now? Why didn’t these women come forward earlier? And why has nobody taken legal action?

    Bill Cosby rape allegations explained

    Why are these allegations coming out now? Why has nobody taken legal action? And what happens next for the man once thought of as 'America's Dad'
    Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain

    You know that headache you’ve got?

    Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain
    Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?

    Scoot commute

    Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?
    Paul Robeson: The story of how an American icon was driven to death to be told in film

    The Paul Robeson story

    How an American icon was driven to death to be told in film
    10 best satellite navigation systems

    Never get lost again: 10 best satellite navigation systems

    Keep your vehicle going in the right direction with a clever device
    Paul Scholes column: England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil

    Paul Scholes column

    England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil
    Michael Dawson: I’ll thank Spurs after we win says defender as he prepares to return with Hull

    Michael Dawson: I’ll thank Spurs after we win

    Hull defender faces his struggling former club on Sunday ready to show what they are missing. But he says he will always be grateful to Tottenham
    Frank Warren column: Dr Wu has big plans for the professionals yet he should stick to the amateur game

    Frank Warren column

    Dr Wu has big plans for the professionals yet he should stick to the amateur game
    Synagogue attack: Fear unites both sides of Jerusalem as minister warns restoring quiet could take 'months'

    Terror unites Jerusalem after synagogue attack

    Rising violence and increased police patrols have left residents of all faiths looking over their shoulders
    Medecins sans Frontieres: The Ebola crisis has them in the headlines, but their work goes far beyond West Africa

    'How do you carry on? You have to...'

    The Ebola crisis has Medecins sans Frontieres in the headlines, but their work goes far beyond West Africa
    Isis extends its deadly reach with suicide bombing in Kurdish capital

    Isis extends its deadly reach with suicide bombing in Kurdish capital

    Residents in what was Iraq’s safest city fear an increase in jihadist attacks, reports Patrick Cockburn
    Underwater photography competition winners 2014 - in pictures

    'Mysterious and inviting' shot of diver wins photography competition

    Stunning image of cenote in Mexico takes top prize
    Sir John Major: Negative West End portrayals of politicians put people off voting

    Sir John Major hits out at theatres

    Negative West End portrayals of politicians put people off voting
    Kicking Barbie's butt: How the growth of 3D printing enabled me to make an army of custom-made figurines

    Kicking Barbie's butt

    How the growth of 3D printing enabled toy-designer to make an army of custom-made figurines