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Investment and risk6. Investment trustsIn this section, we describe briefly the features of investment trusts as an alternative investment to other collective schemes.
Investment trusts are a type of collective investment scheme where many investors pool small amounts of investment resources together in order to achieve greater diversification.
The name Investment Trust (ITs) is slightly misleading in that these collective investment schemes are actually structured as listed limited companies that invest in o... Shortened demo course. See details at foot of page. ...later on.One big advantage of investment trusts is that because of their structure, they are able to borrow (or gear) to invest. This could have the effect of “leveraging” gains for the arrangement even though care should be taken that the trust can afford to repay its borrowings especially accounting for adverse market conditions. An investment trust is operated by a boar...
Shortened demo course. See details at foot of page. ...s investment trusts into 22 main sectors. Click here (opens in PDF format) for the main catergories of investment ...
Shortened demo course. See details at foot of page. ...here (opens in PDF format) for the main catergories of investment trusts. The Net Asset Value (NAV) of an investment trust is the value of the trust’s investments per ordinary share, after taking account of its liabilities. It is calculated by taking:
The total value of the trust’s listed investments at mid market prices Plus its unlisted investments as valued by the director... Shortened demo course. See details at foot of page. ...are is calculated as:(Net assets + money subscribed by warrant holders)/(Shares in issue + new shares issued to warrant holders) (£35m + £4.5m)/(20m + 3m) = £1.72 (rounded up) per share The undiluted NAV per share would be: Net Assets/Share in issue £35m/20m = £1.75 per share The share price of an investment trust should bear some resemblance to the value of its assets. However, because the price is set by supply and demand of the investment trust’s shares, it may well trade at a discount or less frequently at a premium to NAV.
The discount is expressed as the difference between share price and the NAV as a percentage of NAV e.g. if the share price is £1.50 and the NAV is £1.67, the discount is just over 10%. If demand is high and the share price is... Shortened demo course. See details at foot of page. ...Discounts can provide a big income advantage to investors. The discount boosts the net yield of the investment trust. The yield on the underlying investments distributed to shareholders after deduction of charges is a function of the net asset value of the investment trust but the yield on the shareholder is expressed as a percentage of the market price paid. The management charge of the typical investment trust is relatively low and may be more than offset by the effect of the discount. Investment trust companies are allowed to borrow and use the cash raised to increase their investment portfolio. This is known as “gearing”.
Borrowings can be: Loan stock Overdrafts or short term debt Longer term bank debt Debentures Foreign currency loans Pref... Shortened demo course. See details at foot of page. ... markets are likely to fall, there are several options open to them:A proportion of the trust’s assets can be invested in cash or the equivalent of cash Loans can be repaid Investment can be made in fixed interest securities Derivatives can be used to hedge the portfolio. Warrants are relatively high risk investments as they provide capital growth with no dividend payments. They can be traded separately in their own right. They are frequently issued by investment trusts especi...
Shortened demo course. See details at foot of page. ... in the same way as options.Once they are traded, investors can buy and sell warrants separately from the shares. Warrant prices do not always follow the price of their associated investment trust shares. Investment trusts can issue convertible loan stocks.
These offer investors the right to convert their fixed interest loan s... Shortened demo course. See details at foot of page. ...nal conversion date as after that date, the stock generally falls in value and is treated simply as a fixed interest security. These were the subject of much investigation by the regulator in recent years as many split capital trusts suffered problems as a result of falling equity markets and problems associated with trusts investing into shares of other split capital trusts. It resulted in many companies suspending or cutting dividend payments and even defaulting on the payment of projected returns.
The regulator went some way to redressing these problems revising Listings Rules, Model Codes on Directors and Conduct of Business Rules. These changes have been incorporated in to the FCA Handbook. We shall attempt to explain below how in theory these investments should work. Timespan Split capital investment trusts are usually created for a limited time period. At the end of that term, the trust is closed (wound up) and the assets are divided amongst the different classes of shareholders according to a set formula and pecking order. Some trusts provide for the opportunity for shareholder to vote on whether the trust shou... Shortened demo course. See details at foot of page. ...uoted price, a lump sum on wind up would be equal to the initial investment plus 8% per annum for the complete term.Gross redemption yields for income, capital and other variable shares are based on notional growth rates of dividends and capital to allow investors to make approximate comparisons. Hurdle Rates This shows how much the investment trust must grow by on a compound annual basis to repay the pre-determined redemption price. For example a hurdle rate of 4% means that assets must grow at 4% per annum to pay the redemption price on wind up. A hurdle rate of -4% means that there are surplus assets and the a the total assets can decline by 4 % per annum and still have enough to pay the redemption price at wind up. Asset Cover This is another way of measuring the company’s ability to meet or cover the liability to the zero from its assets. A cover of 1 means that the assets exactly cover the zero redemption price. A cover of 50% or 0.5 means that half of the redemption price is covered. C shares are a means of enlarging the capital base of an establis...
Shortened demo course. See details at foot of page. ...the existing shares to the disadvantage of original shareholders. S shares are a means of launching a new inve...
Shortened demo course. See details at foot of page. ... past been described as a perpetual C share. Taxation of investment trust companies
Investment trusts are subject to taxation as follows: Investment trusts that have been approved by HMRC are not subject to CGT on gains from the sale of shares or other holdings in their portfolio; There is no additional tax on franked income (UK dividend income); Corporation tax is ... Shortened demo course. See details at foot of page. ...e liable to CGT at 18% or 28% depending on their other income in the tax year of disposal. This is payable on any realized gains that exceed the annual CGT exemption and the deduction of any previous losses;If held within a NISA all income and capital gains are tax free, apart from the non reclaimable tax credit on UK dividends. REITs are already well established in other countries such as the US, France and Australia.
They are structured as an investment trust that pools investor funds to invest in commercial and possibly residential property. One of their main features is that they provide access to property returns without the disadvantages of double taxa... Shortened demo course. See details at foot of page. ...d at 20% at source. Non-taxpayers will be able to reclaim this tax, with higher rate taxpayers having a further 20% to pay. Distributions made from the non tax-exempt element will be treated as dividends and taxed in the usual way as any other UK dividend.Capital gains made by investors on REITs will be subject to CGT in the usual way. |
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