Money Matters

Investment Trusts

They may be unfashionable to some, but I have long been a supporter of Investment Trusts. Despite their name they are not written under a trust deed, as Unit Trusts are. They are, in fact, Public Limited Companies, listed on the London Stock Exchange, for the purpose of investing with others (who all become shareholders in the Company) in a collection of securities to spread the costs and the risks, just as with Unit Trusts, Life Assurance funds, Open Ended Investment Companies etc. However, apart from their structure, there are two more important features: they are ‘closed ended’ i.e. there are only a specified number of shares in existence. Supply and demand in the market will have an effect on the shares’ value, as well as the values of the underlying holdings. It is worth noting that there may be issues of liquidity, in the case of poor demand. Another important factor is that Investment Trusts can borrow money in order to purchase more shares for their portfolios. This action, known as ‘gearing’ has the effect of multiplying both the gains and losses that market swings create in the value of their shares. As you can imagine, this can result in some quite marked variations on prices, especially in volatile times. A useful and interesting point is that Investment Trusts tend to have slightly lower charges than many other collective investments, which certainly adds to their attraction.

As with any other collective investment, it is important to ensure that the Investment Trusts chosen fit in with the risk profile of the investor and their capacity for financial loss. You would, of course, expect me to remind readers to ensure that they have done the appropriate research before choosing a trust, or take professional advice. On the subject of advice, do make sure that you are aware of the exact status of anyone that advises you on investment business. Since 1 January 2013, financial advice in the UK has changed significantly, and you should be absolutely clear as to the advice you receive. You should know in advance whether your advisor is truly independent, or a representative of a particular company or marketing group. An independent financial advisor (IFA) is obliged to consider the whole of the market in terms of products and providers, and will agree in advance the service that will be provided, the cost of that service, and how and when that cost will be paid. Beware of anyone who is offering something for nothing. Now, to neatly return to the subject of this column, if you would like specific advice on Investment Trusts, then you would probably need to speak to either an IFA or Stockbroker.

Oh! I’ve just seen a ray of sunshine through the window; enough of this, I’m off for a stroll. Enjoy the Spring!

David Foot

Categories: Money Matters

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