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Knowledge centre

Here we seek to address some frequently asked questions about investment trusts.

If you're unable to find what you're looking for, please do not hesitate to phone us on 0117 900 9000 or email us.

Introduction

  • What is the role of the manager and board of directors?

    The investment trust manager is in charge of the day-to-day running of the investment trust. They decide where to invest the money held by the trust and when to sell holdings.

    The board of directors are appointed to uphold the best interests of investors. They are usually independent of the investment manager and will meet on a regular basis to ensure the objectives of the trust are being met.

    Like other companies, shareholders can vote to remove members from the board of directors.

  • What is net asset value (NAV)?

    The net asset value (NAV) is the value per share of all the assets owned by the investment trust, usually expressed as a 'per share' figure. If the holdings of an investment trust, less any debt, are worth £1 million and there are two million shares in issue, the NAV per share is 50p.

    If the trust's assets increase in value, the NAV will grow, and vice versa. Growth in the NAV over time is used to measure the performance of the manager.

  • What are premiums and discounts?

    The share price of an investment trust can differ from the net asset value (NAV). If the current share price is above the NAV, the investment trust is said to be trading at a premium, i.e. it costs more to buy the shares than the underlying investments are worth. When the share price is below the NAV, this is known as trading at a discount.

  • Why do investment trusts trade at a premium or discount to net asset value?

    An investment trusts share price is determined by supply and demand. In theory, if more people are willing to buy than to sell at the current price, the price will rise. Similarly, the share price will fall if there are more investors selling than buying.

    If a trust or the area in which it invests is particularly popular, demand might push the share price to a premium over the NAV. A trust or area that is out-of-favour could trade at a discount to NAV.

  • What is gearing?

    Investment trust managers have the flexibility to borrow money in order to purchase investments - this is referred to as 'gearing'. If the total assets of a trust are worth £100 million, and the manager borrows £10 million. This is expressed as 110% gearing.

  • Why do investment trusts use gearing?

    If the trust manager believes there is a good investment opportunity, but doesn't have any spare cash within the trust, he will borrow money to cover the purchase. This avoids the need to sell holdings in order to make additional investments. The manager needs to be confident he can earn a higher return on the additional investments than the cost of borrowing the money. While gearing can magnify gains if the manager is correct, it also magnifies losses if he is wrong and is therefore a higher-risk strategy.

  • What are total and net assets?

    These are a measure of the size of an investment trust. Total assets are the value of the holdings, plus cash and income for the current year, less any borrowings.

    Net assets is very similar. It is the value of holdings, plus cash and income for the current year, less any borrowings and charges.

  • Do all investment trusts pay a dividend?

    No, to find out if an investment trust has paid a dividend recently view the 'dividends' tab of our investment trust factsheets. Please remember dividend payments can vary and are not guaranteed.

  • What is the annual charge on an investment trust?

    Most investment trusts quote an 'ongoing charge' which is the estimated annual charge of holding the investment trust. This includes the annual fee paid to the fund manager for managing the portfolio, plus regular recurring costs such as directors' fees and audit fees. You can find the ongoing charge on the 'at a glance' tab of the investment trust factsheet on our website. Some investment trusts also charge performance fees which are paid to the manager if they meet certain targets. Performance fees are not included in the ongoing charges figure, but some investment trusts do publish a figure for ongoing charges + performance fees. Investors should refer to the latest annual report and accounts, available on our website, for full details of a trust's charges.

Split capital trusts

  • What are split capital trusts?

    Traditional investment trusts offer just one class of share, in which investors receive income in the form of dividends and if the shares rise in price, capital growth. There are a number of trusts, called 'split capital' trusts, which offer a variety of share classes (detailed below).

    Some share classes might focus on paying a dividend. At the other end of the spectrum some might focus solely on capital growth and pay no income.

    Split capital trusts are often launched with a fixed lifespan, at the end of which, all the underlying assets can be sold and proceeds paid out to each class of share in order of priority. The wind up is usually subject to a shareholder vote. You are therefore not guaranteed the trust will wind up or that you will get your proportion of assets when you expect.

  • What are income shares?

    Income shares are entitled (with some exceptions) to all the income from the trust's assets until the winding-up date. If stepped preference shares (see below) have also been issued by the trust, the income shares receive the excess after payments to the stepped preference shareholders have been made.

    Holders of income shares are generally entitled to a final payment equal to the price at which the shares were first issued. So if the income shares were issued at £1 per share, the final payment would be £1 per share. However, this will be dependent on sufficient monies being generated when winding up the trust. If insufficient monies are available, income shares will only be paid out a proportion of their issue value. Occasionally (and if there are sufficient proceeds) income shares may be entitled to a portion of any capital growth made by the trust. Income shares rank after preference shares (if issued) at wind up, but before capital shares.

  • What are zero dividend preference shares (ZDPs or zeros)?

    Zero dividend preference shares (zeros for short) offer capital growth with a predetermined redemption value, paid from the assets of the trust at wind-up. Zeros are the first class of share to be paid out when the trust is wound up. However, any loans will need to be repaid first, so returns still rely on the performance of the trust's investments and your capital is at risk.

  • What are stepped preference shares?

    Stepped preference shares are relatively rare. Like zeros, they offer capital growth with a predetermined redemption value at wind-up. Unlike zeros, however, stepped preference share dividends should rise at a predetermined annual rate during the life of the trust. Returns will still rely on the performance of the trust's investments and neither capital nor income is guaranteed.

  • What are capital shares?

    Capital shares (with a few exceptions) pay no dividends. They do not have a pre-determined redemption value but instead are entitled to any assets remaining at the end of the trust's life after all the other classes of share have been paid. They are last in the order of priority. The success of capital shares is therefore dependent on the success of the manager in growing the assets of the trust over and above what is required to repay the other classes of share. This makes them a higher risk investment.

  • What are unit shares?

    Some split capital trusts have arranged for a combination of their shares to be packaged together in what is known as a 'package unit'. Packaged units have all the characteristics of an ordinary share issued by a conventional investment trust, although in some cases the component classes of share can be separated out and traded separately.

Buying investment trusts