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An introduction to investment trusts

This article is part of
Guide to Investment Trusts

Investment trusts are stock-market listed companies, so they have share quotes and are traded in the same way as other public limited companies. They are also regulated in the same way by the Financial Conduct Authority in its role as the UK Listing Authority.

But trusts are companies that exist purely to make money for shareholders, says Annabel Brodie-Smith, communications director at the Association of Investment Companies.

Investment trusts, which have to be domiciled in the UK and listed on the main market of the London Stock Exchange, are often grouped together with similar vehicles as ‘investment companies’.

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This is because investment companies that are domiciled offshore – usually in Guernsey and Jersey – are not technically the same and cannot be defined as ‘investment trusts’. They do, however, share common features and are viewed as pretty much the same.

Investment companies in general can invest in many different asset classes and generally offer access to all the same assets as Oeics and unit trusts such as equities and bonds across a range of geographical areas and sectors such as Global Growth, UK, Europe, Asia Pacific.

There is a broad range of investment company sectors to suit clients with different risk appetites,.

Simon Moore, research team leader and senior research analyst at Bestinvest, says investment companies also give access to asset classes that cannot be found in Oeics, especially those where the underlying investments are illiquid and thus much better suited to the closed-ended trust structure.

These include private equity investments, physical property and frontier market projects, and large infrastructure projects, including wind farm projects and even aeroplanes.

Stephen Peters, investment trust analyst at Charles Stanley observes that charges in the open-ended sector have generally come down now commission has been abolished and this, in tandem with shifts in the investment trust sector, is leveling the playing field.

“A number of investment trusts have also been cutting fees and making themselves more like open-ended funds; simplifying capital structures in the main, so making them more easy to understand and buy, by new investors such as IFAs.”

There should be little difference in the cost of managing identical portfolios of an investment trust and a unit trust, adds Mr Moore. Indeed, the fact that they do not have to manage daily inflows and outflows reduces a potential layer of cost.

“But because unit trusts have to cope with daily inflows and outflows there must be an extra administrative burden on open-ended funds, so they should have a higher TER.”

As well as conventional investment trusts, there are several other types of investment trust, points out Ms Brodie-Smith.

These include:

• split capital investment companies, which issue more than one class of share with different entitlements and risk profiles and have a fixed life; and

• venture capital trusts, which invest in micro-cap companies and offer unique tax advantages to reward the higher-risk profile.