In 1868, Queen Victoria sat on the British throne, but she was not yet Empress of India. Most homes were still lit by candlelight, as the light bulb hadn’t been invented.
The Foreign & Colonial Investment Trust was founded in 1868, with the objective to “provide the investor of moderate means the same advantage as the large capitalist.”
155 years later, the F&C Investment Trust is one of Britain’s 100 largest companies, with £5.4 billion of assets. As of 30 June, there were 376 Investment Trusts quoted on the stock market, more than the USA or Europe, with over £265 billion of assets.
Investment Trusts are a particular type of investment fund, structured as a company. With most investment funds, investors buy units, whilst investors buy shares in Investment Trusts. It is an important distinction.
If investors buy units, they add money to the fund; if they sell units, they take money out of the fund, giving managers more, or less, money to invest. In most cases, investors buying or selling shares in an Investment Trust are buying to / selling from other shareholders and not changing the amount the manager has to invest.
This distinction has seen Investment Trusts become particularly attractive for investing in illiquid assets, from commercial property to renewable energy to private equity. Managers are not forced to sell assets to meet unit sales and can invest for the long term.
Unlike conventional funds, Investment Trusts can raise money by borrowing (gearing). This adds additional risk as it can increase returns in the good times but make poor performance worse. In extreme situations, excessive gearing can threaten the survival of an Investment Trust, leaving shareholders with nothing.
Investment Trusts can be focused on particular regions or countries of the world (e.g. Vietnam), particular sectors (e.g. technology) or can be more generalist. Many portfolio managers do not invest in Investment Trusts, but they should never be discounted, and, with a clear understanding of the opportunities, costs and risks, they can play an important part in diversified portfolios.
There are two types of Investment Trust of particular interest to the wealth manager.
- Real Estate Investment Trusts (REITs) invest in property, usually commercial property. To qualify as REITs, they have to distribute at least 90% of profits from property rental to shareholders. The share price of REITs can vary enormously, reflecting sentiment for the asset class, but (except where gearing is a problem), share price moves do not force a manager to buy or sell property.
Managers do not have to hold large amounts of cash to meet redemptions. Property funds will usually have large amounts of cash, a potential drag on performance, to meet potential redemptions but even with this buffer, could be forced to sell properties if redemptions are high.
- Venture Capital Trusts (VCTs) invest in new shares of small companies that are either unquoted or quoted on the AIM market. Shares invested in VCTs have to meet criteria specified by HMRC and by meeting these criteria, investors benefit from generous tax reliefs.
The tax reliefs are available to encourage investors to invest, through VCTs, in high-risk companies that it is hoped will become fast-growing companies of the future. The likes of Fevertree and Zoopla have been successful VCT investments.
If you are looking for investment advice, please speak to a member of our financial planning team on 01223 233331 or email info@mmwealth.co.uk.
