Mike Robertson Associates Ltd, Lifestyle Financial Planners, Battle East Sussex

Investment Trusts




What are Investment Trusts?

An Investment Trust is similar to a Unit Trust in that it invests in the shares of companies, allowing investors to spread the risk of their investments. There are, however, some important differences between Unit Trusts and Investment Trusts. An Investment Trust is a company itself, and you buy shares in the company rather than buying shares in the funds it invests in. An Investment trust is also a closed ended investment - there are a set number of shares, and this number does not rise or fall regardless of the amount of investors.

How is the value of an Investment Trust calculated?

The value of Investment Trusts is calculated differently to that of Unit trusts or other open ended investments due to there being a set number of shares. The 2 main factors that decide the price of the Investment Trust Shares are the value of the underlying investments and the popularity of the Investment Trust Shares in the market.

The value of the underlying investments in the trust is called the Net Asset Value. If there is high demand for a particular Investment Trusts Shares then you may sell them for a higher price. This is called trading at a premium. If the price is exactly in line with the underlying investments then it is referred to as trading at par. A price lower than that of the underlying investments is termed trading at a discount.

The effect of the supply and demand of the shares can lead to their values fluctuating more often than in Unit Trusts.

How does Gearing affect an Investment Trust?

Gearing is where an Investment Trust borrows money to invest. It is unique to Investment Trusts, and can improve their performance if its investments are doing well. If the investments are doing badly, then gearing can reduce their performance even more. This makes a geared Investment Trust a higher risk investment than one which is not.

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