Investment trusts

ultraskinflint

Hi could anyone tell me what the benefits or pitfalls are of these opposed to buying unit trusts. I have been looking at the foreign and colonial website after deciding to use them for my daughters ctc. They seem to have a property fund that ylds over 7% but then you can buy the shares at a 20%+ discount which makes the yld upto over 9%.?

Thanks

Phil

lemonsqueezer

Hello,

Investment trusts are close ended which means that there is a limit to the number of shares of the trust that can be issued, where as unit trusts are open ended so when an new investor wants to join the trust, more units are created.

Also, shares in an investment trust are traded on a stock exchange and so their value call also be affected by supply and demand (although this impact is usually minimal), where as units in a unit trust can only be purchased from the unit trust manager.

Finally, managers of an investment trust can borrow money to fund the purchase of investments, where as this is not allowed in unit trusts. This means that investment trusts can be deemed more risky, athough the returns may also be greater.

wriggly

Another advantage of investment trusts, is that since they are traded on the stock market you can always sell them. During the current difficulties, we've seen some OEICs freeze redemptions due to the difficulty in liquidating their assets.
This is particularly a problem for private equity and property funds.

Farway

Normally investment trusts have lower TERs [Total Expense Ratio] as well, so your money should be used to your advantage & not paying out commision to middle men

Which will explain why you rarely see them advised by financial advisors [salesmen]

sarah_elton

wriggly wrote: »

Another advantage of investment trusts, is that since they are traded on the stock market you can always sell them.

However, as the previous poster said the share price is reflective of:
1) the value of the assets held by the Fund, and
2) supply and demand among investors for the shares

Whereas a unit trust is simply #1.

Therefore, although you always have liquidity in an investment trust, selling in bad markets may mean selling at a low price.

Usually with an investment trust you can find out what premium or discount to the NAV (valuation of the assets in the portfolio) the shares are trading at.

With regards to the point about 9% yield due to the current discount, wouldn't that depend on whether the share price rose back to 0% premium/discount? If it moved to trading at an even bigger discount, surely that would cut into your yield...