HOWINVESTMENTTRUSTSWORK

Back to basics the lowdown

Investment trusts may be considered a bit long in the tooth but for investors looking for a long-term workhorse, they’re a sound choice

Investment trusts may have been overshadowed in recent decades by higher-profile unit trusts and open-ended investment companies (OEICs), but they have been around much longer.The granddaddy of all collective investments, Foreign & Colonial Investment Trust, was launched in 1868 “to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk by spreading the investment over a number of stocks”.

As F&C’s 19th century marketing blurb suggests, collective investments, which include both unit and investment trusts, can help ordinary investors lessen the risks of investing by pooling their cash with that of lots of other investors to buy a portfolio of shares, rather than just one or two. Diversifying in this way reduces the risk of any individual company’s troubles scuppering your investment. Collective investments also have other advantages, including cheaper trading costs and professional management.

But while private investors can access more than 2,400 UKdomiciled funds (unit trusts and OEICs), worth £560 billion in total, as of the end of 2011 they had a choice of just 412 investment trusts, worth £90 billion. This is partly due to the fact that trusts are not promoted to the same extent as their more popular cousins. Many financial advisers say they ignore investment trusts as they are ‘complex’, ‘risky’ and ‘only

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HOW INVESTMENT TRUSTS WORK 2012 | MONEYWISE 5