What are Investment Trusts?

Published by Thomas Herold in Investments, Laws & Regulations, Trading

'Investment Trusts' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

An investment trust represent a type of collective investment pool generally utilized in Great Britain. These closed end funds are established as public limited companies within the United Kingdom primarily. Analysts have stated that the British investment trust was a forerunner of the American-promoted investment company.

In truth the name is somewhat of a misnomer. These investment trusts are not actually legal trust entities whatsoever. Instead they are a legal company or even individual. The reason this is important is because of the fiduciary responsibilities that trustees owe their membership.

When the fund is first established, a pool of all investors’ funds becomes created. The investors then received a set amount of the fixed total number of shares that the trust floats on the launch date. Boards usually hand over the responsibility of the fund management into the care of a professional fund manager. This manager will then invest the fund’s money into a vast range of individual shares of different corporations. This provides the fund investors with a massive diversification into a number of different companies that they could not possibly afford to do using their own limited resources.

These investment trusts may not have any employees, but instead count just a board of directors which is made up of exclusively non-executive directors. This has begun to change over the last few years as competition in the form of other funds emerged. Thanks to commercial property trusts and private equity groups utilizing the investment trust structure for holding vehicles, the structure of the staff and boards has changed in some cases.

Shares of investment trusts trade on various stock exchanges as do shares of typical publicly held corporations. What makes the value of these shares of the investment trusts interesting is that the offered price per share is not always the same as what the underlying share value should be based on the portfolio which the trust holds. When this happens, analysts say that the trust itself trades for a discount or a premium to its actual NAV net asset value.

This sector of the investment trust experienced significant trouble in the years from 2000 through 2003. This was because there was no set compensation plan for the industry. They then came up with guidelines for compensation packages and this cleared up many of the issues overshadowing the space.

One should not confuse investment trusts and unit (investment) trusts. There are some key differences between the two. The manager of an investment trust has the carte blanche legal ability to borrow funds in order to buy shares in company stocks. The managers of unit trusts (which are open ended funds) may not do this without first having a process for risk management established that makes rules on the ways the leverage will be considered and permitted. Such gearing can boost gains earned on investments yet also dramatically expands the risk to investors.

These investment trusts have a history going back around 150 years. The first one established was the 1868 founded Foreign & Colonial Investment Trust. Its stated goal was to “give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks.”

The investment trust is classified in a breakdown by similar characteristics. This permits prospective investors to compare and contrast the various trusts within a certain category more effectively. The trusts are also further broken down according to the kinds of shares they issue. Traditional investment trusts possess only the single class of ordinary shares and enjoy an unending investment vehicle lifespan.

With the rival Splits, or Split Capital Investment Trusts, the structure proves to be more complex. They issues several varying share classes so that investors can match the shares up with their own investment objectives. The majority of such Splits begin with a preset investment life span that the fund determines when it launches. They call this the wind up date. The average wind up date of such a Split Capital Investment Trust occurs between five and ten years from the fund establishment.

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The term 'Investment Trusts' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.