Investment Trusts: Sleepy world awakes to crisis and revolt

They've had a miserable time recently, with falling returns provoking shareholder rebellions, but change is coming and investment trusts

Tony Lyons
Sunday 10 May 1998 00:02 BST
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SUDDENLY it is all happening in the previously sleepy world of investment trusts. This year we have seen fund managers voted out by shareholders, investment trusts turning themselves into unit trusts and even a shareholders' revolt, voting out the directors of one trust.

The confidence crisis means many of the management groups are trying to make themselves more appealing. Flemings, one of the largest investment trust managers, is seeking approval for plans to market its funds in a more effective way.

Investment trusts are also looking for ways to reduce their discounts - the difference between their share price and the net asset value (NAV), which represents the underlying value of the trust holdings. This can be done in several ways, including buying in shares or turning themselves into unit trusts that always trade at net asset value.

The history of investment trusts dates back to the 1860s when wealthy individuals formed a company to invest in fixed-interest bonds issued by the colonies and the US. In 1868, this became the Foreign & Colonial Investment Trust. Today, with net assets worth more than pounds 2bn, it is the largest of the 350 or so investment trusts listed on the stock market.

Investment trusts differ from other collective funds, such as unit trusts, in a number of ways. They are public companies in their own right and have their own board of directors. Shares in investment trusts are bought and sold in the same way as any other listed stock.

Unlike so-called open-ended funds in the unit trust industry, investment trusts have a fixed amount of capital that they raise at the outset. So they have a fixed number of shares in issue. They can raise money from loans later on if the managers think they can invest it and make better returns than the amount of interest they pay for borrowings. This is called gearing and can make for better performance, but at higher risk for investors.

Investment trusts can invest in virtually anything, including property and private companies whose shares are not listed on any stock exchange.

The most popular and biggest trusts are in the general international sector that contains the giants of the industry. Specialist investment trusts are higher risk by definition as they tend to concentrate on smaller companies, commodities, emerging markets or single countries. There are a growing number that specialise in venture capital, funding management buy-outs or even investing in new, start-up businesses. Some - the split capital funds - allow investors to buy shares that will receive either all the income earned by the fund or all the capital growth.

Investment trusts have much lower charges than unit trusts and should be part of any sophisticated investment portfolio. This survey guides you through the selection process.

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