Spare change goes to market
Investment trusts have spent the past decade finding new ways to tempt small savers. On pages 17 to 20 we examine the options for lifting returns while reducing risk
Sunday 22 October 1995
For example, Flemings is the latest investment trust manager to extol the virtues of using an investment trust as the core investment of a personal pension plan. Others are bound to follow suit.
In fact, investment trusts were originally designed for the private investor. The first was launched to enable the Victorian middle classes to participate in the booming investment opportunities of the time.
The main selling-point was that they did not have to invest directly in one company and risk all in something like a double-or-quits South American railway. Instead, they could buy investment trust shares immediately, spreading risk across a number of stocks.
The principle of pooling money and spreading risk still holds good for investment trusts today. But for a long time investment trusts fell out of favour, superseded in the investing public's affection by another pooled investment - the johnny-come-lately unit trust.
Nowadays both vie for investors' spare cash, though a number of fund management companies offer a range of both unit and investment trusts.
Both give easy access to world stock markets, but there are important differences.
Investment trusts are companies quoted on the stock exchange, just like Marks and Spencer and ICI. To invest in an investment trust, you buy its shares. With a unit trust, you buy units.
With a unit trust, the value of your units is directly linked to the value of the trust's investments. But the value of investment trust shares depends on supply and demand.
The value will obviously be influenced by the trust's holdings, but it may not be a full reflection. Historically, investment trust shares have stood at a discount to the value of the underlying holdings. Typically that discount has narrowed over recent years.
Some shares even stand at a premium. They are being bought and sold at a value greater than the true worth of the underlying investments. So with an investment trust, the return will come in part from the performance of the trust's holdings. But it will also depend on whether the discount (or premium) has changed between buying and selling the shares.
If there is a sudden fall in share prices and lots of unit trust investors want to sell up, the fund manager has to sell investments to pay unit- holders. He may have to sell some of his best investments or sell at low prices to raise the cash.
Investment trust managers do not have this worry. You cash in investment trust shares by selling to another investor through the Stock Exchange. The company running the trust does not have to sell any of the underlying investments. Not having this potential to become a "forced seller" makes investment trusts better ways of investing in, for example, emerging markets or venture capital, where buying and selling holdings can be that much more difficult. Against this, though, in falling markets the trust's discount may widen.
Like other companies, investment trusts can borrow money and invest it. This can increase overall returns when markets are rising but give a double whammy to performance when markets fall. Unit trusts cannot borrow money.
Investment trusts also have the power to invest in a wider range of investments than unit trusts.
Some investment trusts, known as split-capital trusts, have a fixed life and different types of share. At their simplest there might be two types. One class of share gets all the capital growth of the trust's investments, the other class gets all the dividend income.
Alternatively, you can buy shares that have a fixed and pre-determined rate of growth. There are, how-ever, no guarantees. Whether you get this fixed return depends on the performance of the trust's underlying investments.
The shares of split-capital trusts can have particular uses for tax and financial planning needs. But it is sensible to get advice on what's what and to make sure you fully understand how they work (a separate article on splits is on page 20).
There are many similarities between unit and investment trusts. Both give investors a range of funds, such as those that specialise in the UK, North America and so on.
But which is best? You have decided you want to invest in a European fund. Should you choose a unit or investment trust? There is no automatic answer.
The decision may rest on which fund manager has the investment remit you want (for example, a remit to invest in privatised companies, or large companies only). It may depend on which manager has the best reputation for delivering the goods.
On average, investment trusts have performed a bit better than unit trusts over a 10- year period. But only on average. Part of the superior performance is down to a general narrowing of discounts. In other words, investment trust share prices have tended to rise a little faster than their underlying investments. But there are limits to how much discounts can narrow and the extent to which the share price will go to a premium. The reverse can also happen - discounts may widen. Buying investment trusts at a premium, therefore, is risky. Where an investment trust is at a premium you should consider a unit trust.
The investment trust industry is well geared up to selling its wares to private investors. The trade organisation has an excellent range of publications and free leaflets explaining all aspects of investment trusts.
o Write to the Association of Investment Trust Companies (AITC), Durrant House, 8-13 Chiswell Street, London EC1Y 4YY (0171-431 5222).
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Questions of Cash: What are my rights if my leak is caused by neighbours’ roofs?
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
Best savings rates are not all they might seem
How to start your own internet business
Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along
- 2 Exclusive: Abusers using spyware apps to monitor partners reaches 'epidemic proportions'
- 3 Andy Murray takes to Twitter to show off his Christmas jumper
- 5 Top 10 travel destinations for 2015: From Haiti and Alaska to Namibia and Iceland
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
Katie Hopkins speaks out on childhood obesity: 'Parents of fat children should be prosecuted for child cruelty'
iJobs Money & Business
Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...
Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...
Not specified: Selby Jennings: SVP Model Validation This top tiered investment...
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
Day In a Page
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
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens