Investment Trusts

What are they?

Investment trusts are public limited companies, which invest in the shares of other companies to make profits for their own shareholders.

Who are they for?

Investment Trusts are a type of collective investment scheme appropriate for individual investors or Trustees of a pension scheme who are looking for an opportunity of investing in a professionally managed portfolio of stocks and shares efficiently and at reasonable cost.

How do they work?

Being a collective investment vehicle, investor’s money is pooled with that of other savers to achieve better buying powers.  As an Investment Trust is a public limited company, it has it’s own independent Board of Directors whose role it is to look after the best interests of the investors.  Typically an Investment Trust will hold the shares of between 50-100 companies. These companies will be independent of the interests of the investment trust directors. 

Like other public company shareholders, investment trust shareholders have the right to:

• A vote at shareholder meetings;
• Receiving dividends
• Receive a share of the capital when the trust is wound up

An investment trust has the power to borrow additional capital through the issue of secured and unsecured loan stock.  These borrowings are used to buy additional investments for the fund.  A trust with a high level of borrowing relative to its share capital is said to be highly geared.

A highly geared fund can produce exceptional returns in rising stockmarkets, since all profits above the fixed interest on the loan are available to shareholders.

A number of trusts are split level trusts.  They sell income shares, which carry entitlement to all the net income on the fund; and capital shares, which carry entitlement to the full capital value of the fund when it is wound up.

All investment trust shares are bought and sold on the stockmarket.  Their bid and offer prices depend on market demand.  The market price can be, and often is, less than the net asset value of each share.  When this happens, the shares are said to be trading at discount to net asset value.  Occasionally, the share price (particularly of  income shares) can rise above the net asset value of the share.  The shares are then said to be trading at a premium to net asset value.

In simple terms, net asset value is the market value of all the assets in the fund divided by the number of shares on issue.

Investments can be made on a single contribution or monthly basis.  One of the attractions of regular saving is known as ‘pound cost averaging’.  The effect if this is that, because the investment drip feeds into the Trust each  month, it avoids the risk of buying all the shares in one go when the price is high.

Tax situation

The company pays no corporation tax on capital gains made on its investment portfolio.

The investor receives dividends net of tax.  Non tax payers and basic rate taxpayers have no further tax to pay (up to higher rate threshold) but higher rate taxpayers pay an additional liability.  The tax credit is non-refundable.

The investor can be subject to capital gains tax on disposal of investment trust shares.