OPEN OR CLOSED?
As companies, Investment Trusts have a 'closed-ended' structure, shares are not created or cancelled based on day-to-day investor demand. Whereas Unit Trusts and Open-Ended Investment Companies (OEICs) are ‘open ended’ with units and shares created and cancelled in response to investor demand, the management of the resultant cash flow can restrict performance, particularly on more specialised trusts investing in either less-liquid markets and/or specialist areas of the market that can be subject to investment fashions.
WHAT DETERMINES THE SHARE PRICE?
The share price of Investment Trusts is determined by supply and demand, and is not a direct reflection of the value of the underlying portfolio. As a result, shares are often priced at a premium or discount to their Net Asset Value (NAV). This provides investors with opportunities, but these need to be carefully monitored. Unit Trust and OEIC prices are based on the underlying value of the portfolios. Most are now quoted at a single price, although some Unit Trusts still quote separate bid (selling) and offer (buying) prices.
Investment Trusts can borrow, gearing their portfolios to manage their exposures to financial markets. This can support the Investment Trusts’ management of risks during rising and falling markets but this needs to be monitored during volatile markets.
Unlike Unit Trusts and OEICs, which must distribute all of their income, Investment Trusts can hold back some income in years of strong performance and use these reserves to support dividends in weaker years.
Investment Trusts can be subject to corporate activity, particularly when shares stand at an excessive discount to NAV or if investment performance has been poor. This can lead to remedial action, including liquidation, share buy-backs, capital reconstruction and manager removal.
DO YOU NEED FURTHER INFORMATION?
Risk Warning:
The value of investments and the income from them can fall as well as rise, and you may not get back the amount originally invested.