| What is an investment trust? |
Investment trusts are companies which are listed on the London Stock Exchange and which invest in the shares of other companies. They can also hold other assets such as property and cash. They are run by boards of directors who appoint professionals to manage the underlying investments – known as fund, or investment, managers.
Investment trusts are known as ‘closed-ended’ funds because they have a finite number of shares in circulation.
When you invest money in an investment trust, the value of your holding is determined by the share price of the trust. This share price reflects the demand for the shares and is related to the value of the trust’s underlying investments. If these perform well, the trust’s shares will tend to rise in value as more investors want to buy them.
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| How do investment trusts work? |
In the UK there are around 180 conventional investment trust companies managing a total of over £61 billion of assets (source: Association of Investment Companies, 31 March 2012). Each trust has its own objective, which dictates the specific type of companies the investment manager must buy into. If it’s a US trust, for example, he or she buys shares primarily in American companies.
Investment managers choose the companies they invest in after carefully assessing their management, earnings, financial strength, share price, and the industries and economies in which they operate.
When an investment trust sells shares it is not taxed on any capital gains it has made, which is also the case for other products, such as unit trusts and OEICs. In contrast, private investors may be subject to capital gains tax when they sell shares in their own portfolio, including shares in an investment trust
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| What do investment trusts cost? |
Trusts have administrative charges to cover annual running costs like management fees, secretarial costs and expenses like directors’ fees and printing costs. These costs are paid directly by the trust and have the impact of reducing returns to investors. This is sometimes known as the total expense ratio or TER.
You will have to pay 0.5 per cent stamp duty on the purchase of shares in investment trusts and may pay commission if you buy through a stockbroker. If you buy investment trusts through a manager’s savings scheme, commission is usually not charged but there may be administrative charges for switching trusts, or for selling shares in a plan.
Children’s investment plans vary from manager to manager so it is important to ask about charges and other costs before you invest.
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| What are the different types of investment trust? |
The trade body, the Association of Investment Companies (AIC), defines 43 different categories of investment trust. The largest of these categories is Global Growth, covering 32 trusts which invest all over the world, with over £19 billion under management as at 31 March 2012.
For more information about the different types of trust you can invest in, see the AIC website at www.theaic.co.uk which lists details of their members’ trusts.
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