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About Investment trusts
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What is an investment trust?
An investment trust is a public limited company, with shares listed on the London Stock Exchange. They invest in the shares of other companies, in the UK or overseas.
Investment trusts are known as 'collective investment vehicles' because they pool investors' money, spreading the risk of stockmarket investment. Their objectives vary, but most investment trusts invest for income or growth, or a combination of the two.
An investment trust has a board of directors to represent the interests of shareholders. And like any other company, it holds an annual general meeting at which shareholders can vote. The board appoints a professional investment manager to manage the assets of the trust. In the case of Portfolio Trust, this is Martin Currie.
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How do they work?
What you get from investment
trusts is full-time, cost-effective, professional management of your money.
Because they are pooled investment vehicles, they represent large numbers of
investors, investing together in a whole range of different shares. So you
spread your risk. Your money is never at the mercy of a sudden drop in one
company's share price.
The costs of investing in an investment trust tend
to be low, especially compared with the cost of other collective investments or
running your own portfolio. When you invest in an investment trust you are
buying the shares of the investment trust itself and not the shares of the other
companies in which it invests. The share price at which you buy does not
necessarily reflect the underlying value of the assets in the trust. This is
because the price is dictated by market demand, and not the value of the trust's
share portfolio. Depending on market conditions and market sentiment, the spread
between the purchase and sale price can be wide.
By their nature,
stockmarkets and share prices fluctuate. That is why an investment trust's share
price is rarely the same as its net asset value per share. When the share price
is below the net asset value it is trading at a discount. Share prices above the
net asset value are at a premium. Discounts and premiums will vary but when we
show the effect of charges and expenses on your investment, we have assumed the
discount/premium is constant.
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Gearing
At its simplest, gearing is borrowing. An
investment trust can borrow money to invest in additional stocks and shares for
its portfolio in the expectation that the returns on the additional investments
will exceed the costs of borrowing.
An advantage to investment trusts is
that they can borrow at much lower interest rates than individuals and other
types of companies because they are dealing in much larger sums and lenders view
them as lower risk. Gearing often occurs when interest rates look low or when a
particularly attractive stock presents a good buying opportunity.
Gearing
generally magnifies the return generated by the trust; if successful, profits
can be greater but so can losses. If money borrowed fails to enhance the trust's
performance, the investors lose - as money from the trust will be used to pay
off the borrowing. Gearing has to be finely judged if it is to enhance, and not
reduce, performance. Policy on gearing varies from trust to trust and is
explained in their annual reports.
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