Investment trusts Flashcards
characteristics
- Collective investment that pools money of many investors
- Spreading across diversified portfolio
- Can invest in any company (quoted or unquoted)
- Can provide venture capital
- Can invest in any country worldwide
How Investment Trusts Work
- Issues fixed number of shares (closed ended)
- Regulated by company law
- Shares traded on London Stock Exchange
- Able to ‘gear’
- External management groups normally undertake day-to-day investment management
- Share price depends on supply & demand
- Offer price - higher price investors pay to purchase shares
- Bid price - lower price investors sell at
- Market makers spread is difference between bid and offer price
Net Asset Value
• Equal to total value of all investments within trust less any liabilities
• How to calculate:
o Take the total value of listed assets at mid-market price
o Plus its unlisted investments
o Plus cash or any other assets
o Less the nominal value of any loans, debentures and preference shares o This is the shareholders’ funds
o Divide by number of ordinary shares to determine net asset value (NAV)
Diluted NAV
- Assumes all outstanding warrants and convertible loan stock are exercised
- This increases number of shares and reduces NAV
Regulation & Approval
- Trusts don’t deal directly with the public
- Public limited company
- Formed & controlled by Companies Act
- FCA lays down principles for companies seeking listing as investment trust
- FCA requires company to seek HMRC approval
- Also means trust not liable for tax on capital gains it makes from sale of shares
capital structure and share class
• Conventional
o Issue one main class of equity share (ordinary share)
o Usually indefinite term although ‘limited life’ investment trusts now exist
• Split capital
o One portfolio of investments but different classes of share o Entitled to different returns
o Ranked in priority on wind-up
o Limited initial life span - usually 5 or 10 years
o Investors can trade through lifespan
Classes of Share
- Ordinary shares are main type of conventional investment trust share, entitled to all of income and capital growth from trust investments (subject to borrowings with prior charge)
- Preference shares pay fixed dividend which must be paid prior to ordinary shareholder dividend payments, prior claim to company assets in event of wind-up
- Split capital shares - different classes: Income shares; broadly entitled to all investment trust income. Capital shares: no entitlement to income but receive remainder of assets on wind-up. Zero dividend preference shares: limited life, fixed redemption, issued at initial value, taxed under CGT not income tax rules. Packaged units: packages of capital, income and zero dividend preference shares
Warrants
- Right to buy at fixed price at pre-determined date or within specified period
- Produce no income therefore no income tax liability
- Taxed under CGT rules
- Can be bought and sold on stock exchange prior to exercise date
- Usually issued as sweeteners with new trust share issues
- Exercising warrants dilutes NAV of existing shares
Gearing
• Can borrow money to buy shares and other assets
• Can arrange long or short-term loans or issue debentures, unsecured loan stock or preference
shares
• Good for shareholder if investment returns achieved with borrowed money exceed cost of loan
• FCA COB rules state enhanced risk warnings to client if adviser recommending or buying
significantly geared investment trusts
Taxation of Investment Trust Companies
- HMRC approved investment trusts not subject to tax on gains within portfolio
- Not subject to tax on franked income
- Corporation tax on un-franked income
Taxation of the Investor
- Dividends taxed as any other dividend
- Liable to CGT on disposals of shares
- If exceed the CGT annual exempt amount
