What are Trust Investments?
Trust investments are a way for the individual investor to participate in stock market investments with a pooled, collective investment vehicle which combines the money of many investors, and places it in a portfolio of shares and securities.
A trust investment may combine various asset classes including stocks and shares, fixed-interest securities, and property.
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Investment trusts are headed by a professional fund manager, and are listed companies with their shares quoted on the London Stock Exchange. The trust is overseen by an independent board of directors, who look after the interests of the shareholders in the investment trust.
There are a wide variety of trust investments, each with its own declared aims and objectives. One role of the board of directors is to ensure that the manager of the trust adheres to the declared objectives of the investment trust.
Some trusts may aim to generate capital growth for shareholders, others may focus on generating income, others still seek to combine these objectives.
While trusts seek to minimise risk by speading investments, they may still have a wide range of varied investments and risk levels, making it essential for an investor to know his own risk profile before choosing a trust investment. One way of doing this is to use the Principle First online investment risk profiler, or to work together with one of our qualified financial advisers.
Establishing the value of trusts investments
Investors purchase shares in investment trusts. The net asset value (NAV) of the shares, at any time, is their value in relation to the total market value of investments and assets in the trust, less any liabilities.
However, with trust investments, a second factor comes into play, when taking a snapshot of the current value of your trusts investments. This is due to the fact that the shares are traded on the open market.
In investment trusts, the net asset value of the shares is influenced by supply and demand for the shares in the stock market. Depending on this demand, the shares may trade at a premium, or a discount, to the underlying net asset value.
Trading at a discount is when the market price of the trust’s shares is less than the net asset value per share.
Trading at a premium is when the market price of the trust’s shares is more than the net asset value per share.
Movements in discounts and premiums reflects the market’s perception of a particular trust, or the market where it invests. It is this secondary factor – market demand - influencing the share value of trust investments, that differentiates them from unit trusts, where market demand does not apply.
As such, it is a combination of net asset value and market demand that will ultimately determine the value of your trust investments.
Investment trusts have the ability to borrow money, which they use to buy shares. This is known as ‘gearing’. Not all trusts borrow in this way, and those that do must first gain the approval of the board of directors.
The aim of gearing is to make a higher return on the investments than the cost of borrowing, and thus increase the value of shareholders’ trust investments.
To discuss trust investments with our experienced advisers, please call 0800 678 5929 or submit an investment enquiry
