But there is a crucial difference. The shares of investment trusts are actively traded on the stock market. This can mean that the share price itself does not accurately reflect the value implied by the underlying portfolio of shares.
So, shares of investment trusts are usually said to be at a discount to net asset value (NAV), ie, less than the value implied by the underlying portfolio, or at a premium to NAV, ie, greater than the value implied by the underlying portfolio. The discounts and premiums reflect market demand. For instance, if the sector being invested in is out of favour, or if the market takes a poor view of the fund manager, then the trust will be at a discount, with the opposite being true of premiums.
This makes buying investment trust shares more tricky to assess for ordinary investors than unit trusts/oeics where the unit/share price reflects the value of the underlying portfolio.
What can you buy?
Just as with other fund types, investment trusts are gouped in sectors reflecting the market or markets invested in. They can range from big general funds investing in UK companies, or across the world, to funds investing in just one country or sector, such as technology.
There is a growing number of so-called split capital investment trusts. This splitting refers to the underlying company structure which may mean - at its simplest - that the company issues two classes of share: income and capital, with the majority of the income generated by the portfolio going to income share holders in dividends, and the majority of capital growth going to capital share holders.
This, the discount/premium to NAV and the fact that these companies have winding up dates, may mean it is wise to take professional advice prior to dealing in these funds.
Where can you buy and cost
Investment trusts are said to be the cheapest way into the stock market because, unlike unit trusts/oeics they do not have an up-front charge of up to 5%. But you have to pay dealing costs to the stockbroker you buy them from.
They have a set scale of charges of around 1.65% for the first ¯¿½2,000 invested with a minimum commission of around ¯¿½20. However, cheaper deals are available, especially from brokers who trade on the internet. Here, the minimum commission level could be as low as around ¯¿½15.
But the lowest dealing costs in investment trusts are available from the investment trust management groups themselves. They offer savings schemes that allow lump sum investment or regular savings at very low charges. Sometimes this can be a dealing cost of as little as 0.2%. The regular savings schemes start with minimum levels of as low as ¯¿½50.
And don't forget that because investment trusts are shares traded on the UK market, you have to pay 0.5% stamp duty on purchases.
Annual management charges for these funds are sometimes written in a way that makes them very difficult to understand. But they usually work out at less than 1% a year - again comparing favourably with unit trusts/oeics.
Further information can be obtained from the Association of Investment Trust Companies' web site.
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