Investment trust

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Investment trusts are companies that invest in the shares of other companies for the purpose of acting as a collective investment.[1]

Investors' money is pooled together from the sale of a fixed number of shares a trust issues when it launches. The board will typically delegate responsibility to a professional fund manager to invest in the stocks and shares of a wide range of companies (more than most people could practically invest in themselves). The investment trust often has no employees, only a board of directors comprising only non-executive directors. However in recent years this has started to change, especially with the emergence of both private equity groups and commercial property trusts both of which sometimes use investment trusts as a holding vehicle.[1]

Investment trust shares are traded on stock exchanges, like those of other public companies. The share price does not always reflect the underlying value of the share portfolio held by the investment trust. In such cases, the investment trust is referred to as trading at a discount (or premium) to NAV (net asset value).[1]

The investment trust sector, in particular split capital investment trusts, suffered somewhat from around 2000 to 2003 after which creation of a compensation scheme resolved some problems.[2][3][4]

One of the key differences between an investment trust and a unit trust, is that an investment trust manager is legally allowed to borrow capital to purchase shares. This leverage may increase investment gains but also increases investor risk.[1]

Contents

[edit] History

The first investment trust was started in 1868 by F&C. The objective of the Foreign & Colonial Investment Trust was: 'to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks'. As well as being the oldest investment trust, it is now also the largest global growth investment trust in the world and still open to investment.[5]

[edit] Geographic distribution

Investment trusts are common in the UK and well established within legal and regulatory frameworks. In other jurisdictions similar types of closed-end investment vehicle exist but may be known by different names. See collective investment schemes for more information.

[edit] Split Capital Investment Trusts

'Traditional' investment trusts normally issue only one type of share (ordinary shares) and have a limited life. Split Capital Investment Trusts (Splits) have a more complicated structure. Splits issue different classes of share to give the investor a choice of shares to match their needs. Most Splits have a limited life determined at launch known as the wind-up date. Typically the life of a Split Capital Trust is five to ten years.

Every Split Capital Trust will have at least two classes of share:

In order of (typical) priority and increasing risk

  • Zero Dividend Preference shares - no dividends, only capital growth at a pre-established redemption price (assuming sufficient assets)
  • Income shares - entitled to most (or all) of the income generated from the assets of a trust until the wind-up date, with some capital protection
  • Annuity Income shares - very high and rising yield, but virtually no capital protection
  • Ordinary Income shares (aka Income & Residual Capital shares) - a high income and a share of the remaining assets of the trust after prior ranking shares
  • Capital shares - entitled most (or all) of the remaining assets after prior ranking share classes have been paid; very high risk

The type of share invested in is ranked in a predetermined order of priority, which becomes important when the trust reaches its wind-up date. If the Split has acquired any debt, debentures or loan stock, then this is paid out first, before any shareholders. Next in line to be repaid are Zero Dividend Preference shares, followed by any Income shares and then Capital. Although this order of priority is the most common way shares are paid out at the wind-up date, it may alter slightly from trust to trust.

Splits may also issue Packaged Units combining certain classes of share, usually reflecting the share classes in the trust usually in the same ratio. This makes them essentially the same investment as an ordinary share in a conventional Investment Trust.[6][7]

[edit] See also

[edit] References

  1. ^ a b c d Investment Trusts. Your Money. The Motley Fool (13 March 2006).
  2. ^ Adams, Andrew A (October 2004). The Split Capital Investment Trust Crisis. John Wiley & Sons. ISBN 978-0-470-86858-4. 
  3. ^ Carlisle, James (30 October 2002). The Lesson From The Split Capital Debacle. Market Comment. The Motley Fool.
  4. ^ Split Capital Investment trusts. Treasury Select Committee. House of Commons (5 February 2003).
  5. ^ History. Foreign & Colonial Investment Trust.
  6. ^ Davies, Rob (6 June 2001). Explained: Zero Dividend Preference Shares. Specials. The Motley Fool.
  7. ^ Carlisle, James (1 September 2005). Understanding ZDPs. Fool's Eye View. The Motley Fool.

[edit] External links


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Investment management
Collective investment scheme structures
Investment Styles
Theory & Terminology
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