The “its” ad campaign spearheaded by the Association of Investment Trust Companies makes it a good time to raise the subject of investment trusts with clients. Investment trusts are an effective method of collective investment with a long track record of success and some unique features.
Investment trusts are suitable for a variety of financial planning objectives, such as paying off mortgages, saving for children or complementing retirement savings.
Investment trusts provide a broad investment spread. They may hold shares in up to 100 or more different companies at any one time. They provide access to wide range of investment sectors such as venture capital, North America and UK, and have excellent returns over the longer term.
Investment trusts have independent boards of directors who closely monitor the activities of the manager. They also have low charges. Research carried out by Fitzrovia International last year illustrates that as investment trusts increase in size, their total expense ratios dec-rease dramatically.
They also offer professional fund management, different types of shares for different financial planning purposes and the ability to borrow (gear) to take advantage of investment opportunities. There are also a number of packaged products including Isas, Pep transfers, saving schemes and pensions.
Net asset values,
discounts and premiums
The net asset value per share is the term used to describe the value of the company's assets divided by the number of shares. The NAV is calculated from the total assets of a trust minus all prior charges such as loans and debenture stock. Investment trusts trade at either a discount or premium to the NAV.
The discount or premium is the difference between the NAV and the share price expressed as a percentage per share. If an investment trust has a NAV of 100p and share price of 90p, the trust is at a 10 per cent discount. However, if an investment trust has a NAV of 100p and share price of 110p, the trust trades at a 10 per cent premium.
Whether an investment trust trades at a discount or premium largely depends on the supply and demand for that trust. Share prices and NAVs are shown daily in the national press.
Information on discounts and investment trust performance statistics are also published monthly in the AITC's Monthly Information Service, which is available online at www.itsonline.co.uk.
Split-capital investment trusts, first devised in 1965, have a limited life with a fixed winding-up date and one portfolio of investments, but issue more than one type of share. By doing this they are able to meet the differing investment needs of investors for either income or growth. Within the split-capital trust there are various classes of share which can be used for specific financial planning purposes.
Zero-dividend preference shares (zeros), pay no income at all, but offer a capital return at a predetermined rate, paid from the assets of the trust at wind-up. Income shares offer the net income from the trust's investment portfolio for as long as the share is held.
Income and residual capital shares offer a combination of income and capital growth. Investors will be entitled to a high and rising income plus all the surplus assets of the trust at the winding-up date after other prior-ranking classes of shares have been repaid.
Capital shares offer only capital growth. They are entitled to any assets remaining at the winding-up date after other classes of shares have received their entitlements.
Split-capital investment trusts are a highly efficient way of investing for either income or capital growth – or a combination of both – within the same trust. They are sufficiently flexible to suit many needs, and have been especially popular with parents saving for school fees.
Supporting the IFA
The “its” campaign is raising the profile of investment trusts among your clients. IFAs are at the centre of the AITC activity and there has been a very positive response to the its marketing club.
The club provides IFAs with a newsletter, training materials, seminars and workshops. The AITC also hosts regular forums across the country – the next is on Thursday, April 26 at Sopwell House Hotel and Country Club, St Albans.
Of particular interest to IFAs will be the AITC's marketing collaboration with Transact, a consolidated portfolio service run by Integrated Financial Arrangements.
The Transact service enables IFAs to purchase any investment trust for their clients with a single-charging structure and to receive both initial and trail commissions. The service can be accessed by post, phone or online – an advantage for many IFAs when compared to the online-only fund supermarkets.
A further advantage is that IFAs can also access any unit trust, Oeic or quoted equity, providing the widest possible spread of investments.
In addition, the AITC has relaunched its extranet site for IFAs – www.itsforifas.co.uk. The upgraded site is a one-stop information point for IFAs. It contains investment trust performance statistics, the latest news from the AITC and investment trust managers, and enables IFAs to download AITC literature. There is also a new guest article every fortnight.
To register for the www.itsforifas.co.uk extranet site,IFAs just need to insert their contact details, PIA number and SIB number.