An easy low-cost way to diversity your portfolio
Investment trusts are a form of collective investment where your money gets pooled together with other investors making it an easy low-cost way to diversify your portfolio. You can spread your risk by purchasing an investment trust and gain access to investment opportunities which you may not be able to find on your own.
It can be overwhelming finding the right one to meet your investment needs with several hundred to choose from in the UK.
Rather than in physical assets, Investment trusts invest their money in the shares of other companies. As they are like a company, they have the ability to borrow money to invest, this is not the case for unit trusts and OEICs. There are only a few that take advantage of this to any significant scope.
Investment trusts are referred to as ‘closed-ended funds’. As with traditional companies, they have a finite number of shares in existence. When buying shares in an investment trust they usually have to be purchased from someone who already owns shares. These can be purchased through either a stockbroker, or by a savings scheme set up by the investment trust company themselves. Unit trusts and OEICS are ‘open ended funds’ where more units are created each time they are purchased.
The value of the investment fund is made by reference to their net asset value (NAV) per share or unit. The net asset value per share is calculated as the total value of the trust’s portfolio of investments divided by the total number of shares or units that it owns.
Discounts and premiums
The ‘net asset value per share’ for Investment trusts is calculated and declared at regular intervals. This could be daily, monthly or some on an irregular basis. You may anticipate their share prices to be the same as their net asset value. For an array of reasons, they will tend to trade at a discount to this amount. One of the main reasons is that you could purchase the exact same portfolio of shares for yourself directly in the market, without having to incur the ongoing management charge.
Due to these discounts, it makes investment trusts marginally more of a risk, with the value of your investment being affected by the amount that the ‘discount to NAV’ alters throughout the duration of your investment, in addition to the performance of the assets they possess.
If the discount becomes narrower, you could make a slight gain on your money. If the discount gets wider, the results will be reversed. If you intend to hold an investment trust for numerous years, any movement in the discount should be out-weighted by the performance of its assets.
The size of the discount represents the popularity of an investment trust, although this can be inaccurate if the fund’s discount isn’t calculated on a regular basis. You may find you are comparing the current price with that of an asset value calculated many weeks prior.
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The charges are similar to that of buying shares in a normal company. There is the stockbroker’s commission with both buying and selling. This can be minimised by using a cheaper broker. With the difference between the bid and offer prices of the shares, you will also lose another relatively small amount. Stamp duty is also payable at 0.5% on purchases.
There will be an annual management fee and other ongoing administration costs that you will also incur. The costs from these charges are usually offset from the income a trust receives from all of its investments, the difference is then distributed as dividends to the trust’s shareholders.