Investment trusts are companies that invest in the shares of other companies for the purpose of acting as a collective investment. In financial markets, a share is a Unit of account for various financial instruments including Stocks Mutual funds Limited partnerships A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors [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. A non-executive director (NED also NXD or outside director is a member of the Board of directors of a company who does not form part of the executive management 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. A share price is the price of a single share of a company's Stock. In such cases, the investment trust is referred to as trading at a discount (or premium) to NAV (net asset value). Net Asset Value (NAV is a term used to describe the value of an entity's assets less the value of its liabilities [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. A unit trust is a form of collective investment constituted under a trust deed This leverage may increase investment gains but also increases investor risk. In Finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified and/or enhanced [1]
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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'. Foreign & Colonial Investment Trust ( is a publicly-traded Investment trust. 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]
Geographic distribution
Investment trusts are common in the UK and well established within legal and regulatory frameworks. The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom, the UK or Britain,is a Sovereign state located In other jurisdictions similar types of closed-end investment vehicle exist but may be known by different names. A closed-end fund, or closed-ended fund is a Collective investment scheme with a limited number of shares. See collective investment schemes for more information. A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors
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]
See also
References
- ^ a b c d Investment Trusts. A closed-end fund, or closed-ended fund is a Collective investment scheme with a limited number of shares. An income trust is an Investment trust that holds Income -producing Assets The term also designates a legal entity, Capital structure A Real Estate Investment Trust or REIT (ˈriːt is a Tax designation for a corporation investing in Real estate that reduces or eliminates Corporate A Venture Capital Trust or VCT is a highly tax efficient UK closed-end Collective investment scheme designed to provide capital finance for small Your Money. The Motley Fool (13 March 2006). The Motley Fool is a commercial Website about Stocks investing, and Personal finance.
- ^ Adams, Andrew A (October 2004). The Split Capital Investment Trust Crisis. John Wiley & Sons. John Wiley & Sons Inc, also referred to as Wiley, is a global Publishing company that markets its products to professionals and consumers students and instructors ISBN 978-0-470-86858-4.
- ^ Carlisle, James (30 October 2002). The Lesson From The Split Capital Debacle. Market Comment. The Motley Fool. The Motley Fool is a commercial Website about Stocks investing, and Personal finance.
- ^ Split Capital Investment trusts. Treasury Select Committee. House of Commons (5 February 2003). The House of Commons' is the Lower house of the Parliament of the United Kingdom, which also comprises the Sovereign and the House of Lords
- ^ History. Foreign & Colonial Investment Trust.
- ^ Davies, Rob (6 June 2001). Explained: Zero Dividend Preference Shares. Specials. The Motley Fool. The Motley Fool is a commercial Website about Stocks investing, and Personal finance.
- ^ Carlisle, James (1 September 2005). Understanding ZDPs. Fool's Eye View. The Motley Fool. The Motley Fool is a commercial Website about Stocks investing, and Personal finance.
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