Twins that invest with distinction

UNIT AND INVESTMENT TRUSTS Simon Read looks at the differences between unit and investment trusts

Unit trusts and investment trusts are similar in concept - they collect money from individuals, pool it and invest it in line with a specific objective But they are quite different in both structure and operation.

Unit trusts are by far the most popular of the two: more than pounds 109bn is invested in them, according to Autif (the Association of Unit Trust and Investment Funds) while there are 335 investment trust companies in the UK with assets of pounds 45bn, according to the AITC (Association of Investment Trust Companies).

A unit trust is a fund split into equal units that can be bought and sold. The price fluctuates as it is directly linked to the value of the fund; if the fund is performing well, the unit price will be higher, and vice versa.

The fund manager puts together cash from hundreds or thousands of different investors and invests this collective fund - generally in shares, but sometimes in other assets. It is the fund manager's performance that can affect the price of the units and that is what investors pay for through annual management fees.

Unlike unit trusts, investment trust shares are not directly linked to performance. Because investment trust company shares are quoted on the stock market, their price will fluctuate. Supply and demand can have a huge influence on the price, for instance, as can market sentiment; although if the investment trust is performing well that will obviously be reflected in the popularity of its shares.

In simple terms, just buying investment trust shares can help their price, as the supply of shares is reduced, thus pushing up the price as long as demand remains.

That is the main difference between the two types of trust. If a unit trust manager performs well, the value of units will rise, so investors get the full benefits of choosing the right trust. Investment trusts may be less certain, as market sentiment can be fickle, although the fact that investment trusts companies, uniquely, can borrow money to invest increases the potential returns.

q Contact: Autif (0171 831 0898) for more information on unit trusts and AITC (0171 588 5347) for information on investment trust companies.