• Choosing investment trusts

    An investment trust is a public limited company with shares quoted on the stock market. When you invest in an investment trust you effectively become a shareholder in that company. Investment trusts primarily invest in the shares of other companies but there are some that contain bonds or other financial assets like commercial property.

    Investment trusts are a highly popular and well-established way of investing. F&C were the pioneers of this type of investment vehicle launching Foreign & Colonial Investment Trust in 1868.

    An investment trust is an excellent way of gaining access to the potential rewards that active management of a stock market investment can offer – without needing to constantly monitor and manage your portfolio.

    Benefits of an investment trust

    An investment trust pools your money with that of other investors and employs professional fund managers to invest this money in a wide range of different companies.

    This means that, even if you only have a small amount to invest, you can gain exposure – cost-effectively – to a diversified and professionally-run portfolio of shares.

    Your risk is also spread much more than if you were reliant on the success of one or even a handful of companies. If the companies that the fund managers invest in do well, the value of the investment trust will grow and so should the value of the shares you own in it.

    As well as investing in companies both in the UK and abroad, investment trusts can invest in property, bonds and cash. Other benefits of investment trusts include:

    • Ability to borrow = Enhanced return potential – The trust’s manager can borrow money to increase market exposure – a tool that can support returns in rising markets. This is normally referred to as gearing. If a trust borrows the equivalent of 10% of its assets then it will be 10% geared.
    • Independent board – Like any listed company, investment trusts are overseen by an independent board that acts on your behalf and closely monitors investment performance. They also have the ability to change the fund manager should they be concerned about the performance of the Trust.
    • Professional expertise – Investment decisions are taken by professional fund managers who spend their time researching individual companies and markets.
    • Global potential – Through investment trusts, you can gain access to opportunities at home and abroad and in both traditional and alternative asset classes.
    • Value for money – Many other collective (or pooled) investments involve higher costs in the form of initial investment fees (as high as 5%) or annual management charges (around 1.5%) Investment Trusts are a relatively cost-effective way of accessing the stock market.
    • Regular and consistent income – In contrast to open-ended funds – which are obliged to pass on all the dividends they receive in any given year, investment trusts are able to retain some of the income they generate in the good years so that they can bolster dividend payments in the bad. Over the longer term, the income from shares has proven to be a significant component of overall total returns.
    • Tax advantages – When an investment trust sells shares, it is not taxed on capital gains it has made, unlike direct investment made by private investors.
    • Performance potential – historically over the longer term investment trusts have delivered impressive performance compared to the average Open Ended Investment Company (OEIC).

    Past performance is not a guide to future performance. The value of investments in the stock market can go down as well as up and you may not get back your original investment. If you are unsure if investing in an investment trust is right for you, please seek professional financial advice.

  • Guide to Investment Trusts 


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