Profit from investment trusts
Investment trusts are collective investments listed on the stockmarket. They are popular with parents saving over the long term and can be more flexible and work out cheaper in terms of charges than their better-known counterparts, unit trusts or OEICs (open-ended investment companies).
They are lower profile than their open-ended siblings, partly because before commission was abolished under the Retail Distribution Review in January 2013, financial advisers tended not to recommend them - precisely because they earned no commission on them. But now, you may start seeing them added to the lists of investments recommended by advisers. Their main appeal is that they are cheaper - annual management costs are well under 1%, compared to 1.5% for unit trusts.
Investment trusts are like other funds in that they pool investors' cash to invest in a number of underlying company shares, perhaps very broadly invested across the world or a specific market. But, unlike other funds, they are companies listed on the stockmarket, have boards of directors (who can hire and fire fund managers) and have a limited numbers of shares available. This means investors can buy and sell them through a stockbroker just like any other share on the stockmarket.
Saving plans for children
The management groups behind them also promote investment trusts as ideal vehicles for regular saving, by offering low-cost savings schemes with low minimum investment levels. Several also promote savings plans especially for children, often with even lower entry-level amounts, typically £100 for lump sums or £20 to £25 a month for regular savings.
According to the Association of Investment Companies (AIC), a £1,000 lump sum invested in the average investment company (with annual charges of 3.5%) over the past 10 years would be worth £2,833 today. Over 18 years, it would be worth £4,177.
A £50 monthly payment invested in the average investment company with charges accounted for, would be worth £9,581 over 10 years and, over 18 years, it would be worth £24,835.
Normally, there are no initial or annual plan charges. But other charges include stamp duty (0.5% on purchases), the spread between buying and selling prices and, if you opt for a plan that has access to several different investment trusts, the cost of managing a portfolio. Some also charge performance fees.
Investment trusts' price advantage is starting to be eroded, however, as the unit trust industry is beginning to make its fees more competitive, but investment company fees remain generally lower for now. Meanwhile, a number of investment companies have also started reducing their own fees and removed performance charges, according new research by wealth manager Canaccord.
Another big difference for investment trusts is they can gear up - that is, they can borrow money to buy more shares in a sector they expect to do well. Managers also have more control over when share dividends are distributed, whereas unit trusts must do it when they receive them. Justin Modray, founder of financial website Candid Money, says: "Unlike unit trusts, an investment trust can retain up to 15% of its annual income as reserves, providing a potential buffer to help boost income in lean years."
This strategy has worked well, with more than 29 equity income investment trusts managing to increase their dividends every year over the past 10 years.
Tim Cockerill, head of collectives research at investment management firm Rowan Dartington, is a fan of investment trusts. He says: "What sets them apart from other funds is that they are equities traded on the stockmarket and, like Marks & Spencer shares, you can trade them any time the market is open. With open-ended funds, you can only trade them once a day.
"They often trade at a discount so that when you buy them at a discount you are buying the underlying investment more cheaply than that you would in the market. So, for example, if the investment trust was trading at a 10% discount and it contained BP, you'd be buying BP for 10% less."
Discounts can widen or narrow, however. Cockerill explains: "They've been narrowing in the last 12 months, which enhances performance of the fund although it makes it more expensive for someone buying. If you buy on a regular basis though, you don't need to be concerned about the discount widening as you can buy more cheaply."
Investment trusts Cockerill favours include Murray International, managed by Aberdeen Asset Management. It is a global fund, which, at the time of writing, is at a 15% discount; Jupiter Prima Donna Growth, which has a big focus on UK blue-chip firms; Henderson Opportunities, a relatively high-risk fund investing in small and medium companies; and Alliance Trust, a giant in the investment world (with assets of £2.4 billion). For a bit of spice, he suggests Pacific Assets, managed by First State - recent winner of a Moneywise Customer Service Award for Most Trusted Fund Manager. "It's a sensible investment house, a quality company, quite conservative with strong balance sheets."
As for savings plans, he likes the Alliance Trust savings scheme, with its minimum investment of £50 and its 30-strong list of underlying investment trusts to choose from - and you can mix and match with other types of fund, too.
Several also offer Jisas, including Alliance Trust Savings, F&C, Fidelity, JPMorgan (JPM) and Witan. Many investment trust managers also manage unit trusts, such as JPM, for example. Of JPM's top 10 Jisa fund choices, seven are investment trusts; several of them higher-risk funds. However, its top 10 also includes diversified, large-cap funds, such as JPMorgan Claverhouse and JPMorgan American investment trusts, which reflect the more conservative strategy many parents adopt as their child nears 18.
You can buy investment trusts (individually or through Jisas or share plans) direct from the fund manager or through platforms such as Alliance Trust, Hargreaves Lansdown and the Share Centre. Savings plans need to be started with the fund manager because, as an Alliance spokesman put it: "In much the same way you cannot open an RBS deposit account with Lloyds, you cannot open an Alliance Trust Savings scheme on any other platform."
One advantage of investing in a savings plan, as opposed to a Jisa or Isa, is that there are no maximum annual investment limits and you can have as many schemes as you like - but you will have to keep an eye on the tax implications.
There is more information on investment trust saving for kids on the Association of Investment Companies' website or you can call for a free factsheet on 0800 085 8520.
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).