| What is an Investment trust ?
Investment trusts are public limited companies whose
only purpose is to invest in assets across a diversified
portfolio of shares and securities which are selected
and managed by professional fund managers in order to
make a profit for its shareholders.
Investment trusts can generally :
- Invest in any kind of company, whether its shares
are quoted on a stock exchange or it is an unquoted
private company.
- Provide venture capital to new firms or firms which
want to expand.
- Invest in any country throughout the world.
Investment trusts have a fixed amount of money under
management and this is issued as a fixed number of shares,
hence the description "closed ended". One
of the advantages of this fixed capital structure is
that managers can take a long term view with their investments
and do not fall prey to violent swings in investor sentiment
which can happen at inopportune times e.g. when a large
number of investors suddenly decide they want to withdraw
their money (which unfortunately can be a problem that
unit trust managers face)
Capital structure
Investment trusts are generally divided into two types
– conventional and split capital which reflects
differences in their capital structures.
Conventional Trusts
have a simple share structure consisting of ordinary
shares, though they may also have loan stock or preference
shares. The majority of conventional trusts have an
indefinite term and some are now over 100 years old,
but some of the newer conventional trusts now start
off with limited lives of say five or ten years, after
which shareholders are asked to vote on whether to continue
the life of the trust.
Split Capital trusts
have one portfolio of investments as do conventional
investment trusts but, by issuing more than one type
of share, they are able to meet the differing needs
of a range of investors. Split capital trusts have a
limited life with a fixed winding up date when the assets
are due to be paid back to the shareholders.
The different classes of share in a split capital trust
are ranked in order of priority. If, in addition the
trust has debt, debentures or loan stock, these are
ranked first before the shareholders to be repaid in
a winding up. Each share class then follows in a particular
order. In other words, for every split capital trust
there is a predetermined sequence in which the various
classes of shares are repaid.
The value of an investment is not guaranteed and
can go up and down depending on investment performance.
You could get back less than you have paid in.
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