Investment Trusts

What are Investment Trusts?

An Investment Trust is a public limited company which makes investments in shares, bonds, property and other assets for the benefit of its shareholders. They are listed on the stock exchange and are traded like normal public companies.

How is the Investment Trusts price determined?

Just like normal companies the price depends upon the demand for them and what investors are willing to pay. However, the key figure to note when considering the price is the Net Asset Value (NAV).  

What is the NAV?

THE NAV is value of the assets held by an investment trust. An example would be if the Investment Trust holds £100 million in assets and has 50 million shares then each share is worth £2 per share, or 200p. This is the NAV. So you would expect the shares of an Investment Trusts to trade at approximately the NAV, but this isn’t usually the case.

Premiums or Discounts?

Because the prices can vary like normal share prices, the price of an Investment trust will often trade at a Premium or Discount to the NAV.

This can be calculated by (Price – NAV)/NAV)*100 to give a %.

If the company has a NAV of 100p, but is priced at 110p, this is trading at a 10% Premium.

If the company has a NAV of 100p, but is priced at 90p, this is trading at a 10% Discount.

What do Investment Trusts invest in?

Different Investment Trusts specialise in different investments. They will usually state in the title of the trust the general strategy. The main elements to watch out for are:

Location: e.g. UK, Asia, USA.
Sector: e.g. Finance, technology, Energy.
Strategy: e.g. Growth, High income.
Asset Class: e.g.  Equity, Property.

One site that we use to compare Investment Trusts is Trustnet.

What are the risks?

Like any stock traded on the exchange prices will fluctuate and there is a potential risk to lose. Although because Investment Trusts largely invest in a diversified pool of assets they are considered less risky than just buying into to 1 company.

It is very unlikely that an investment trust will go bust, just because it can usually sell assets quickly if needed to. Trusts that invest in property however are likely to be less liquid.

Having said that there have been several examples examples of trusts that have got into real trouble or have gone bust.  

One is the Quilter Trust which was a split capital investment trust and in April 2002 suspended trading after shares in the fund fell more than 90%.  

In 2014 the Invesco Property Income trust got into trouble due to gearing. It could not afford to repay RBS for its credit and the in 2015 the fund wound up.

Gearing

Investment Trusts have the advantage over Open Ended Funds in that they can take advantage of borrowing money to invest. This is called gearing, but it can increase risk. If markets rise your investments can rise faster, but if markets fall your investment can fall faster. An example would be if you had £1000 invested and the gearing is 10%, you will effectively have £1100 working for you. Ofcourse the trust will have to pay interest on the borrowing. You can see gearing ratios in your investor documents before you invest.

Dividends

Investment Trusts, unlike open-ended funds can choose when to distribute the income. Before you make a purchase of a Trust it is worth checking out the Dividend Yields.

How to buy Investment Trusts

Investment Trusts are available to buy through your stock broker or fund platform. It is important to note that they are also available through tax efficient accounts such as ISAs.

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