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Frequently asked questions

Frequently asked questions

Investment Trusts

How are investment trusts regulated?

Investment Trusts are quoted companies listed on the London Stock Exchange with Boards of Directors; they are subject to the listing rules of the UK Listing Authority established under the Financial Services and Markets Act. Investment Trusts are also subject to the Companies Act 1985, as amended. The conduct of investment managers to promote packaged products (ISA, Share Plans) with underlying investment trust investments, are regulated by the Financial Services Authority in the United Kingdom.

What is the difference between an onshore investment trust and an offshore investment company?

They are both closed end investments quoted on the London Stock Exchange offering shareholders a specific investment objective from a diversified portfolio of investments. There are some differences in tax treatments: the Channel Islands based funds generally issue Dividends gross; whereas UK trusts, as equities, issue dividends net. Both are eligible for an ISA. One important difference is in investment limits: an onshore trust cannot invest more than 15% of its gross assets (at the time of investment) in any one single holding, whilst no such limit applies to the Channel Islands-registered companies.

What is a multi-class or split capital investment trust?

A split capital trust is an investment trust company with more than one class of share (hence "split capital"), each class having different rights to participate in income or capital returns. Split capital investment trusts were originally devised over 100 years ago and operate on the basis that shareholders look for either income or capital growth and are able to meet such requirements through choice of the different share classes. Split capital investment trusts have a fixed life span, at the end of which they are wound up or rolled over into a new fund.

A zero dividend preference share or "zero" is a particular class of share within a split capital investment trust. Its principal characteristics are:

  • No dividend is payable at any stage to the zeroholder, who can only receive a capital return rather than income from the trust.
  • At the redemption date (the date when the split is due to wind up), the zeroholder is entitled to receive a pre-established redemption price provided that there are sufficient assets in the trust.
  • In determining whether there are sufficient assets to meet the payments due to zeroholders, the only prior call on the assets of the trust is in favour of any bank which has lent money to the trust.

Zeros can be contrasted with the other two main share classes, income and capital shares. As the name suggests, income shareholders are entitled to a regular dividend payable from the assets of the trust during its lifetime. Capital shares do not pay dividends and do not have a predetermined value. Instead, capital shareholders are entitled to share in the remainder of the assets of the trust on winding-up once the prior interests of any lenders, zeroholders and income shareholders have been met. Consequently, the entitlements on winding-up to the assets of the trust are in the following order:

  • Bank lending;
  • Zero holders;
  • Income shareholders; and
  • Capital shareholders.

Individual trusts can have two or more classes of share in different combinations.

What does gearing mean?

Unlike unit trusts, investment trusts can borrow money and invest the proceeds. This will increase returns to investors in a rising market (and vice versa in falling markets). This is known as financial gearing. A gearing factor of 120 means that on a trust with equity of £100 million it has £20 million of debt (bank borrowings).

There is also structural gearing, which is normally a term applied to split capital trusts or multi-class trusts. In a simple trust, typically each class of share is entitled to either all the income from the underlying portfolio or all the capital growth. If each class of share was issued in a 50:50 proportion, the income share could be said to have double gearing. Given that a rise in the portfolio would result in a disproportionate rise in the entitlement of each share class, the valuation tools used to analyse structurally geared trusts are different. Typically analysts on income shares look for hurdle rates (how much the underlying assets have to grow each year for investors to get their stake back), and redemption yields (annual yield on the trust to wind up).

How many investments are held within an investment trust portfolio and how are they managed?

Typically anything from 50 to 100 shares. The Fund Manager must have regard to the objective of the trust. To that end the underlying stocks are bought or sold to deliver either capital growth or income.

How actively are investment portfolios managed?

The "portfolio turnover" (how frequently shares are bought and sold) varies from fund to fund. Technology portfolios may get turned over more quickly than, say, a fund investing in convertibles.

Many of the terms, used in relation to the performance of investment trusts, are technical in nature. How do I find out more?

You will find many of the technical terms defined in the Glossary. If you are uncertain, you should consider taking independent financial advice.

What is the spread for an investment trust and who actually sets this, also what is the standard spread? And does this spread include the government stamp duty or not?

The spread is the difference between the bid price (the price you pay to buy shares) and the offer price (the price you receive when you sell shares). The spread depends on supply and demand and is set by marketmakers. It does not include government stamp duty.

What is the mid price?

It is the average of the closing buy and sell prices. The underlying investments of an Investment Trust are valued at the previous day's closing mid prices.

How are dividend dates and rates calculated and by whom?

Dates are set, ideally, to provide a regular spread of income and are most likely on a quarterly basis. The amount of the dividends will depend on the underlying portfolio and the objective of the trust.

Is the discount/premium of a share calculated on its, mid price/bid price/ or offer price?

All are calculated with reference to the previous closing mid price.

What service does the company secretary perform for an investment trust?

The company secretary co-ordinates all aspects of the trust to ensure that it complies with its legal and financial reporting including any circulars., report and accounts, interim reports; convening board meetings and minutes, as well as liaison with the Board and external advisers.

What service does the Board of Directors for a trust perform?

The Board is responsible to shareholders; it oversees the external relationships, principally the fund management relationship, to ensure that the trust's objective is met.

What role do the Registrars perform?

The Registrars maintain a register of shareholders and warrant holders.

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