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Investment Trusts
What is an Investment Trust?
Like unit trusts and OEICs, investment trusts allow investors to use the expertise of professional investment managers and to obtain the potential benefits of diversification and risk spreading. But, they also have some unique features that make them a quite different breed of CIS. First and foremost, they are closed-ended. This means that when an investment trust is created it issues a fixed number of shares to investors and therefore the capital remains fixed for the life of the trust. However, it is possible for investment trusts to raise capital by gearing (or borrowing). There is no limit as to how much an investment trust can borrow although it is common for a trust's investment policy to state a permitted level. Unit trusts and OEICs, on the other hand, are only permitted to borrow up to 10% of the value of the fund. On the down side, the higher capacity to gear can make it riskier to invest in investment trusts.
The price of the shares in an investment trust is determined by factors such as market supply and demand, market confidence and the general economic climate. Shares are traded at a premium or discount to the net asset value of the fund.
Structure
Contrary to what the name suggests, investment trusts are in fact listed companies. This means that their shares are listed and traded on the London Stock Exchange (LSE).
Management
Every investment trust is governed by a Board of Directors, which has several key responsibilities including setting investment objectives, selecting and appointing a professional investment manager and monitoring investment performance.
Authorisation
The regulation and authorisation of investment trusts is again different to that of unit trusts and OEICs in that they do not fall under the direct regulatory scope of the Financial Services Authority (FSA). Instead, because they are listed companies, they are governed by the rules contained in the Companies Act 2006 and the UKLA Listing Rules.
However, the person appointed as fund manager to the trust must be authorised by the FSA. The FSA also regulates the promotion of investment trusts to the public. Furthermore, the FSA has direct regulatory responsibility for investment trusts that are bought through a wrapped product such as ISAs and pensions.
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Disclaimer: The material and information contained on this website is provided for general information only. DATA does not provide any investment advice and you are recommended to obtain professional financial advice where appropriate.
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