OPEN OR CLOSED?
As companies, Investment Trusts have a ‘closed-ended’ structure, with a fixed number of shares in issue. Whereas Unit Trusts (and OEICs) are ‘open ended’ with units and shares created and cancelled in response to investor demand ~ the management of the resultant cash flow can restrict performance, particularly on more specialised trusts investing in either less-liquid markets and/or specialist areas of the market that can be subject to investment fashions.
WHAT DETERMINES THE SHARE PRICE?
The share price of Investment Trusts is determined by supply and demand, and is not a direct reflection of the value of the underlying portfolio. As a result, shares are often priced at a premium or discount to their Net Asset Value (NAV). This provides investors with opportunities, but these need to be carefully monitored. Unit Trust and OEIC prices are based on the underlying value of the portfolios, the former being quoted by means of dual bid and offer prices and the latter by a single price.
Investment Trusts can borrow, gearing their portfolios to increase exposure to investment markets. This can be beneficial, but needs to be monitored as it can also have an adverse effect on asset values, particularly in falling markets.
Investment Trusts can be subject to corporate activity, particularly when shares stand at an excessive discount to NAV or if investment performance has been poor. This can lead to remedial action, including liquidation, share buy backs, capital reconstruction and manager removal.
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