Investment Trust Companies Flashcards
What is an Investment Trust
- Collective investment
- Managed by professional investment manager
What can Investment company do?
- Invest in any kind of company (listed/non-listed)
- Provide Venture Capital
- invest anywhere in the world
- Subject to any restrictions in articles of association
How do investment trust companies work?
- Structured in same way as normal company
- Board of directors
- Fixed number of shares
- regulated by company law
- shares traded on LSE
What is the role of the directors?
- Look after the interests of the share holders
- can employ fund manager directly (Self-managed trust)
- OR contract to external management group
Explain Diluted NAV per share
- Some inv. company issue loan stock that is convertible to ordinary shares
- This will reduce the NAV per share if they take up the conversion
Calculation for Diluted NAV per share
Net Assets + money subscribed by warrant holders / number of ordinary shares + new shares issued to warrant holders
Explain what trading at a Discount means
- Share price lower than NAV per share
- Discount = difference between share price and NAV per share as a % of NAV Per share
Explain what trading at a premium means
- Share price higher than NAV per share
- Premium = difference between share price and NAV per share as a % of NAV Per share
When do Discounts narrow?
- When investment performance is good and demand for shares increases
- Better return on share price than underlying assets
FCA requirements for listing as Investment Trust
- Inv. Managers must have adequate experience
- Adequate spread of risk
- must not control, seek to control or be actively involved in companies it invests in
- Must not be a dealer in investments
- have a board independent of its mgmt.
HMRC requirements for HMRC approval
- Not ‘close’ company (controlled by 5 or less people)
- Listed on LSE
- doesn’t retain >15% of gross income
What are the 2 types of trust structures
- Conventional Trusts
- Split capital trusts
Explain a conventional trust
- One main share class only
- entitled to all of income and capital gains produced by the trust
Explain Limited Life Investment Trusts
- Conventional Trust
- Shareholder vote whether to keep the trust going or wind it up
- typically extends for 3 years then another vote.
Explain Split Capital Investment Trusts
- Different classes of shares
- Entitled to different returns and ranked in particular order of priority in winding up
- Some offer units - packages of different share classes that produce similar returns to normal ordinary share.
- Limited life span - 5-10 years then wound up
Explain Redemption Yields
- Measure capital and income return on particular share class until wind up.
- Expressed as annual %
- Based of assumed growth rates of -2.5%, 0, 2.5%, 5%, 7.5% and 10%
Explain Hurdle Rates
- Growth rate investments must grow at to:
- Repay each share class
- just repay the prior charges ranking before each share class
Explain Asset cover
- Measure of whether company can meet the liability to share classes
- pre-determined redemption value / Assets of company
What are the classes of shares in an investment trust company?
- Ordinary Shares
- Preference Shares
- Split Capital Shares
Explain what Split Capital Shares are
- 2 types of share:
- Income Shares - entitled to all the income
- Capital shares - entitled to no income but all remaining assets
What are warrants?
- The right to buy shares at a fixed price at pre-determined date
- bought and sold on LSE
- Taxed under CGT
Why do investment companies do share buy backs?
- To return money to shareholders
- to tackle their discount
- Must seek shareholder permission
Can investment Trusts borrow and what is it known as?
- Yes
- Known as gearing
Equation for calculating Gearing
total gross assets/net assets x100
What is Structural Gearing
- Different share classes have varying levels of risk.
- number of share classes and entitlements effect level of structural gearing
Requirements for Geared Investment Trusts
FCA - Enhanced risk warnings if:
- uses gearing as an investment strat
- invests in other inv. trust companies
- result of exposure to gearing is likely to subject value of investments to significant fluctuations compared to underlying investments
What are the charges on an investment trust company?
- Annual mgmt charge - inv. mgr. costs
- other expenses incurred within fund (combined with AMC = OCF)
What are the disclosure requirements for an investment trust company
- Must provide a KID
Where can you buy/sell investment trust company shares?
- Through stockbroker
- online investment platforms
- via regular savings schemes
How are Investment Trust companies taxed?
- No tax on any gains from sale of shares/holdings
- no additional tax on franked income (dividends from shareholdings in uk companies)
- Corporation tax on unfranked income
How are investors in Investment Trust Companies Taxed
- Income taxed as dividend income
- CGT on disposal
