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 But for a long time investment trusts fell out of favour, superseded in the investing public's affection by another pooled investment - the johnny-come-lately unit trust.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

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voicesVicky Chandler: Zoella shows us that feminism can come in all forms
PROMOTED VIDEO
Sport
nflAtlanta Falcons can't count and don't know what the UK looks like
News
i100
Arts and Entertainment
High notes, flat performance: Jake Bugg
music

Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat

News
The Putin automaton will go on sale next month in Germany
videoMusical Putin toy showing him annexing Crimea could sell for millions
News
news

Powerful images of strays taken moments before being put down

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

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Day In a Page

    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
    Ed Sheeran hits back after being labelled too boring to headline festivals

    'You need me, I don’t need you'

    Ed Sheeran hits back after being labelled too boring to headline festivals
    How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

    How to Get Away with Murder

    Shonda Rhimes reinvents the legal drama
    A cup of tea is every worker's right

    Hard to swallow

    Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
    Which animals are nearly extinct?

    Which animals are nearly extinct?

    Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
    12 best children's shoes

    Perfect for leaf-kicking: 12 best children's shoes

    Find footwear perfect to keep kids' feet protected this autumn
    Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

    Arsenal’s ray of light ready to shine again

    Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
    Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

    Moyes’ show of sensitivity thrown back in his face... by Ferguson

    Manchester United legend tramples on successor who resisted criticising his inheritance
    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

    Lonely Planet’s Best in Travel 2015

    UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London