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All about Investment Trusts

By beled | November 19, 2013

David Leslie comments, ‘I am often asked to explain the allure of investment trusts (ITs).  At Belmont, we view the advantages of investing in ITs as significant and have enjoyed much success over the years through including them in client offshore portfolios.

ITs are typically London listed and are collective investments, much like unit trusts.  They invest in global markets and can also be region specific.  There are several distinct advantages to investing in ITs.  Firstly, they often trade at a discount to net asset value (NAV) which means that you can buy a quality portfolio of shares or securities at a discount (eg. £100 of shares at a 10% discount, equating to a £90 cost). A current example (October 2013) is British Empire IT which has an excellent underlying portfolio and is trading at a significant discount to its NAV.

Furthermore, ITs often have high quality investment teams eg. Aberdeen, RIT Capital and British Empire.  Unsurprisingly, we recommend buying a high quality team investing in high quality securities!

When asked about specific differences between ITs and unit trusts, Leslie comments, ‘In essence both investment trusts and unit trusts do exactly the same thing. They are collective investment schemes which have varied mandates and underlying portfolios which reflect those mandates.

Investment trusts are listed vehicles and therefore closed ended while unit trusts are unlisted and are open ended. Investment trusts therefore enjoy a major advantage during times of market stress because underlying securities do not have to be sold. The shares are merely sold and bought in the market. Of course discounts tend to widen at such times, but the company’s assets remain intact.  Unit trusts on the other hand have to sell securities to fund redemptions. In times of market stress this will often be the highest quality most liquid stocks which then degrades the quality of the portfolio.

Also worth noting is that cost structures for ITs are generally lower than unit trusts.

Whichever vehicle you are looking at it’s the quality of the investment team that is paramount.’


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