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

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