For market share, pool your cash

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The Independent Online
Investment Trusts are the original form of pooled funds, in which a number of people combine their savings to have them managed by an expert.

They are public companies quoted on the stock exchange, and their sole business is investing in the shares of other companies.When the investment trust is first set up, it pools all the money it attracts from investors and buys shares in a wide range of companies. The investors receive shares in the trust, based on how much they have invested.

By putting money into an investment trust, the individual, in effect, gets a stake in a large portfolio of shares.

Investment trust companies are "closed-end" funds, which means the company has a fixed number of shares. As with any other type of shares, the price fluctuates, based on supply and demand. This in turn will depend on both internal factors - such as the fund's recent performance - and external factors, such as the performance of the local economy and stock market sentiment at any one time.

The investment trust company has a net asset value (NAV), which is the total value of all its assets - the shares it owns in other companies. The NAV of the trust can be different to the price at which the trust's shares are trading on the stock market.

Where the trust's shares are worth less than its NAV, the trust is said to be trading at a discount. Where the trust's shares are worth more than its total NAV, the trust is said to be trading at a premium.

A trust may trade at a discount because the market thinks the shares it owns are likely to fall in value, or because the assets have increased in value but there is a time lag before the trust's share price catches up. A trust may be trading at a premium because the market thinks the real underlying value of its assets has not yet been fully realised.

Investment trust companies employ specialist fund managers to decide which shares the trust should buy and sell. They can own shares in up to 200 companies at one time, and in some of the bigger trusts this can rise to up to 400 companies.

The first investment trust was formed in 1868 by Foreign & Colonial, which now has more than pounds 2bn under management.

Over the past 100 years the ranks have grown steadily, so that there are now about 335 investment trust companies. Between them they manage investments worth more than pounds 55bn. Investment trusts vary in their investment objectives. For example, some aim to achieve high income and so invest in shares that have a high yield, while others concentrate on investing in shares that will provide good capital growth. Some investment trust companies invest all over the world, while others specialise in a particular geographical area, such as the UK, Europe, North America and the emerging markets.

Investment trust companies are divided into about 20 sectors. The most popular with private investors are the international and general sectors, which include most of the largest trusts and which aim for a combination of income and long-term capital growth. While these sectors may not be the top performers over any one period, they consistently perform well and so offer a smoother ride than some of the more specialist sectors.

In the 12 months to the beginning of November this year, the average investment trust grew by 9.3 per cent. During this period the best-performing sector was property, which grew 32.1 per cent. But over five years, while the average investment trust has grown 81.7 per cent, the property sector has been the second worst performer rising just 34 per cent.

The best-performing sector over five years has been the Far East, excluding Japan, which has risen 160 per cent. But over the past 12 months this sector has performed badly and is down 4.4 per cent, making it the second worst sector this year.

As with all stock market speculations, investments in these trusts should be a long-term venture. Typically, you should be looking to invest for at least five years so as to be able to ride out the peaks and troughs of the markets.

You can buy shares in an investment trust company through a stockbroker or an intermediary. If you want advice on what type of investment trust company to invest in, you should speak to an independent financial adviser who is qualified to give advice on the subject, or you should use a stockbroking advisory service.

Many investment trusts companies also run savings schemes. These enable you to invest a regular sum each month (from pounds 25 upwards) in the trust.

The investment trust company will pool all the money each month and then buy shares on the open market.

The investment trust company charges shareholders an annual management fee, which covers the cost of its funds managers and also the research.

This fee varies from 0.2 per cent on large funds up to 1.5 per cent on the more specialist funds that require much more extensive research. The charge is made to the actual trust and so comes out of its assets.

q For a more detailed introduction to investment trusts - and for details of which investment trusts companies run savings schemes - contact the Association of Investment Trust Companies on 0171 431 5222.