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

INVESTMENT trusts have enjoyed a renaissance over the past 10 years. The companies that run them have successfully caught the attention of small investors And it does not look as if they are content with recent progress.

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 But for a long time investment trusts fell out of favour, superseded in the investing public's affection by another pooled investment - the johnny-come-lately unit trust.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

Sport
footballHe started just four months ago
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Sink the Pink's 2013 New Year's Eve party
musicFour of Britain's top DJs give their verdict on how to party into 2015
PROMOTED VIDEO
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

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

    Aren’t you glad you didn’t say that?

    The worst wince-and-look-away quotes of the year
    Hollande's vanity project is on a high-speed track to the middle of nowhere

    Vanity project on a high-speed track to nowhere

    France’s TGV network has become mired in controversy
    Sports Quiz of the Year

    Sports Quiz of the Year

    So, how closely were you paying attention during 2014?
    Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

    Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

    From Armstrong and Miller to Pointless
    Sanchez helps Gunners hold on after Giroud's moment of madness

    Sanchez helps Gunners hold on

    Olivier Giroud's moment of madness nearly costs them
    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect