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Investment Trusts The first investment trust was established in 1868 to allow individual investors to pool together their savings to diversify their investments. Like many forms of collective investment schemes, investment trusts pool together investors money to purchase equities, fixed interest securities, gilts, property, etc. They are also permitted to invest in unquoted companies, e.g. those that are not listed on main Stock Exchanges around the world. However, unlike other collective investment schemes, they are registered companies listed on a Stock Exchange. There are approximately 300 investment trusts in existence, each having it's own stated investment objectives. There are trusts investing on a worldwide basis known as international generalist trusts, trusts investing in specific countries/ regions, trusts investing in specific themes such as pharmaceuticals or technology. In addition a trust's objective may be to provide capital growth, income or a combination of both, offering a wide range of risk profiles and objectives to suit most investors. Investors buying shares in an investment trust will buy at a discount or a premium to net asset value and the price paid will be a reflection of the supply and demand for such shares. Sentiment on stock markets as a whole may also have some significance on the price. NET ASSET VALUE This is the value of the underlying investments, divided by the number of shares in issue. If XYZ Plc has issued 1 million shares and it's underlying portfolio is worth £2 million then the net asset value is £2.00 per share. Shares can trade below and above their net asset value. DISCOUNTS & PREMIUMS A discount occurs when the company's share price is below it's net asset value. In the above example of XYZ Plc, if the underlying value of the investments total £2.0 million, i.e. £2.00 per share and the investor buys at 180p the discount would be 10%. The reverse can also occur. The same trust, trading at £2.20 per share has assets of £2.0 million. Each share has a net asset value of £2.00 therefore the investor is paying a premium of 10%.
GEARING Another difference between collective investment schemes and investment trusts is the ability to borrow money to enhance returns from the portfolio. Hopefully, the manager can then invest the money to achieve a greater return than the interest payable, thereby increasing the value of the portfolio. This does add additional risk to a portfolio. If the manager does not achieve the required growth to meet the interest payable then the share holder's funds will be diluted. In addition the investment trust must provide for repayment of the debt at the appropriate time. CHARGES Investment trusts management charges are cheap compared to their counterparts, unit trusts. Average annual management charges for an investment trust are between 0.3 and 0.5% compared with a typical uint trust charge of between 1.25%/1.5%. The difference between the buying price and the selling price of the shares varies. AVAILABILITY In addition to lump sums or regular purchase through a stockbroker investments can be effected direct with the investment managers who offer lump sum, regular savings and ISA accounts - the tax free savings vehicle. See our Library for more details of ISA's. SUMMARY
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This Company is Authorised & Regulated by the Financial Services Authority