There's life in the old investment trust yet!

Maybe they're a tad old-fashioned, but at current discounts, who can resist the investment fund?

Investment trusts have been around for much longer than unit trusts, yet many investors just ignore them because they find their structure too complicated. Advocates of investment trusts say you could be missing out on opportunities today if you avoid these ol' traditional stockmarket funds.

Investment trusts have been around for much longer than unit trusts, yet many investors just ignore them because they find their structure too complicated. Advocates of investment trusts say you could be missing out on opportunities today if you avoid these ol' traditional stockmarket funds.

"They are suitable for anyone who wants to save or invest over the longer term," says Daniel Godfrey, director general of trade body, the Association of Investment Trust Companies. "There is a huge variety of investment trusts available which provide everything from high risk... to very low risk," he says.

The first investment trust was launched in 1868 by Foreign & Colonial. It was the world's first collective investment vehicle, and aimed to raise £1m to invest in government stocks of foreign countries and colonial territories.

At the time, the prospectus said the trust aimed, "to give the investor of moderate means the same advantages as the large capitalist in diminishing the risk of investing in Foreign and Colonial Government stocks, but spreading the investment over a number of different stocks."

The principle is the same. Like unit trusts and open-ended investment companies (Oeics), investment trusts are pooled funds of stocks and shares from a wide range of issuers. But unlike the other types of fund, they are incorporated as quoted companies, and instead of buying a unit in a fund, investors buy shares in that company.

Closed-ended funds with a fixed amount of capital, no one can buy shares in an investment trust unless someone else is willing to sell. Therefore, the share price fluctuates according to the rules of supply and demand, rather than as a direct reflection of the value of the underlying investments of the fund. Hence, trusts often trade at either a discount or a premium to their net asset value (NAV).

At the moment, shares in investment trusts are trading at an average discount of 14 percent to their NAV, according to the Association of Investment Trust Companies. Emerging-markets trusts are trading at an average discount of 23 per cent. Fund management groups say the reason for this undervaluation is largely technical, and they have been doing their utmost to bring prices up to what they believe is a more realistic level.

On their behalf, the AITC is now in the second year of its multi-million pound "its" advertising campaign. The publicity drive aims to introduce 75 percent of UK adults to investment trusts over five years. The AITC says that traditionally, the customer base for investment trusts has been institutional investors. But mergers between life-insurance companies have created companies that are now large enough to do their own investing and are less reliant on investment trusts.

It is largely this institutional withdrawal from investment trusts which has opened up the discounts to net asset value, seen in trust share prices, experts say. But the AITC believes that as the welfare state recedes, people will increasingly need investment vehicles - including investment trusts -- to provide for themselves in retirement.

It is this discount - or premium in some cases - which makes investment trusts appear complicated to many smaller investors. By contrast, unit trusts seem simpler because the combined price of all the units in issue should always add up the value of the assets held.

However, closed-end funds may enable fund managers to invest more effectively. Jason Hollands of discount broker Best Investment says that in a market downturn, unit-trust investors are likely to sell their units, which forces the unit trust manager to liquidate some of their holdings to repay the unit-holders. This often means the manager must sell the best stocks because they are more liquid.

"But an investment trust can continue to hold the same investments - the manager's investment strategy is not being dictated by market sentiment. He could even start buying," in a downturn, and pick up some bargains, says Mr Hollands.

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, this is riskier, but can mean potentially higher returns.

There is one type of investment trust which can be particularly useful for specific investment aims. 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 come 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 to shelter them from capital-gains tax liability.

But it is the underlying investment, rather than the vehicle, which is important. "People get too caught up with which vehicle they should be in, when what they should be asking is which area of the market should I be in," says Mr Hollands.

* AITC: 020-7431 5222;

www.itsonline.co.uk

* Best Investment: 020-7321 0100

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

News
peoplePerformer had recently been diagnosed with prostate cancer
News
The surrealist comedian at the Q Awards in 2010
people
News
The comedian, 42, made the controversial comment following the athlete’s sentencing to five years for the culpable homicide of Reeva Steenkamp on Tuesday
people
Life and Style
Could you tell the difference between this and an organic alternative?
food + drink

Culinary experts in The Netherlands thought it was 'fresh' and 'tasty'

PROMOTED VIDEO
Arts and Entertainment
One Direction
music
Sport
Today's Liverpool Echo back page
football
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Arts and Entertainment
JK Rowling will not be releasing a 'romance' novel anytime soon
books
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to US
Life and Style
tech

Of all the computers Apple has ever made there’s only one that Steve Jobs had to sell his car to finance

Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidates on the verge of tears as they were ejected from the boardroom
News
One of the 'princesses' in the video
videoYouTube reinstates sweary video after takedown for 'violating terms'
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
Arts and Entertainment
film

Marvel has released first teaser trailer week early after it leaked online

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

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
    Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

    'Renée Zellweger's real crime was to age'

    The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
    From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

    Disney plans live-action remakes of animated classics

    From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
    Thousands of teenagers to visit battlefields of the First World War in new Government scheme

    Pupils to visit First World War battlefields

    A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
    The 10 best smartphone accessories

    Make the most of your mobile: 10 best smartphone accessories

    Try these add-ons for everything from secret charging to making sure you never lose your keys again
    Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

    Liverpool v Real Madrid

    Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
    West Indies tour of India: Hurricane set to sweep Windies into the shadows

    Hurricane set to sweep Windies into the shadows

    Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
    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?