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A boon for the small investor By Sonia Speedy
Investment trusts are often overlooked in favour of the more widely marketed unit trusts, or open-ended investment companies (OEICs). Yet they can offer equally good opportunities and at a lower cost. There are currently 315 investment An investment trust is a company that is quoted on the stock exchange. But instead of selling a particular product, such as petrol or mobile phones, the trust makes its money from buying and selling shares in other companies. A fund manager is employed by the trust's board to decide what to buy and sell. Investment trusts are not a million miles away from the more familiar unit trust in the way that they invest in stocks and shares. The fundamental differences between the two The investment trust issues shares in itself - which is what investors buy. These shares are generally only issued when the investment trust is created, so the total number of shares on offer remains the same, regardless of demand unlike OEICs or unit trusts. This is known as being 'close-ended'. With so many investment trusts available, there's no shortage of variety to choose from. Some specialise in a specific market, such as technology or property, while others invest geographically - in the UK or emerging markets, for example. Some focus on providing capital growth - making the value of your overall investment grow - while others aim to give investors a regular income, as well as some capital growth. Another vital difference between investment trusts and other collective investments such as unit trusts and OEICs is how they are priced. If you take all the available shareholder funds in an investment trust - the company's assets less its liabilities - and divide it by the total number of shares in that company, you get the net asset value (NAV) per share, which is the figure used in our awards. Because investment trust companies are quoted on the stock exchange, the price of their shares is determined by the stockmarket on the basis of supply and demand, and so may not be equal to the NAV per share. But there are pros and cons to investment trusts. Like other collective investments, they give the average investor - even those with only a small amount to invest - the chance to invest in a whole range of shares. Many trusts have saving schemes that let you put in as little as £50 a month, although some are as low as £25. Having a wider range of shares helps investors spread their risk, adding diversification within an investment portfolio. Gary Reynolds, director and chief investment officer of investment boutique Courtiers, says most investment trusts hold at least 60 stocks. Costs and charges Because you're pooling your money with other investors you benefit from economies of scale, so dealing costs and administration are cheaper. Investment trusts also have low charges compared with other types of collective investments. This is because the board of directors is separate from the fund manager, so it can ensure running costs are kept low down. Added to this, investment trusts don't pay commission to financial advisers or spend money on extensive marketing. Investment trusts do not have an initial charge, while the annual management charge (AMC) also tends to be lower than a traditional unit trust - it's usually between 0.5% and 1% - although there are some exceptions. In comparison, most unit trusts have management fees of around 1.5%, and front-end charges of between 3% and 5%. The independent board of directors also provides an extra level of corporate governance, as does the extra regulatory requirements that go along with being a quoted company. Beware gearing But an important factor to bear in mind is an investment trust's ability to borrow money (gear). So, if fund managers spot an opportunity, they can borrow money to invest more in it. "In rising markets investment trusts tend to do better, because they take advantage of their corporate structures. But in falling markets the reverse is true. You don't want to be geared into a downturn," warns Mike Woodward, head of investment trusts at Foreign & Colonial. While gearing makes investment trusts more flexible, this adds another level of risk above and beyond that of the unit trust. As a result, the longer-term the investment is the better, as it gives you more time to recover from any fluctuations. Share classes This is where investment trusts get more complicated. Some offer different types of shares within them. These are known as split capital investment trusts, and you get different rights - and different levels of risk - depending on which type you own. Some split shares will aim to pay regular dividends, while others will only pay out a capital amount when the trust comes to the end of its life. Who are they suitable for? There is a wide variety of investment trusts is available. As they are a riskier investment than a unit trust, because of the pricing, gearing and split capital elements, it's important for most people to get advice. Buy shares in an investment trust through a stockbroker or a financial adviser. Get access through an investment trust manager if you want to invest in an investment trust saving scheme or an ISA. Naturally, you'll have to pay fees to the adviser or stockbroker, along with the normal stamp duty cost (0.5%) on buying shares.
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