1. CISI – Financial Products, Markets & Services
Topic – Investment Funds
(7.5 Investment Trusts)

2. What is an investment trust?
Investment Trusts are set up as a company NOT a trust
Board of Directors
Uphold the best interest of the investors
Usually independent of the Investment Manager
Meet on a regular basis to ensure the objectives of the trust are being met
Investment Manager
In charge of the day-to-day running of the investment trust
Decide where to invest the money held by the trust and when to sell holdings
Invests in a diversified portfolio to lessen risks
The cash from the issue of shares is invested in a number of investments (Usually shares in other companies)
Set-up as a listed company with the number of shares issued remaining fixed for many years (Closed-ended)
Investment Trusts
If the value of the investments grows, the value of the investment trust’s company shares should rise too. Dividends are also paid to shareholders.
Shareholders
Buy shares in the investment trust via the stock exchange to buy into the fund
They can vote to remove members from the board of directors.

3. Gearing
Unlike OEICs and unit trusts, Investment Trusts are listed companies (PLCs), and can therefore borrow more money on a long-term basis by:
Taking out bank loans or
Issuing bonds
This process is known as gearing
This approach can:
Improve returns when markets are rising, but
Exacerbate losses when markets are falling
The greater the level of gearing, the greater the level of risk

4. Gearing
The greater the level of gearing, the greater the level of risk
Gearing Improves returns when markets are rising
The greater the proportion of debt, the more gains are magnified to shareholders
100% Equity
50% Equity, 50% Borrowing
Gearing Exacerbates losses when markets are falling
The greater the proportion of debt, the more losses are magnified to the shareholders
100% Equity
50% Equity, 50% Borrowing

5. Real Estate Investment Trusts (REITS)
Investment Manager
Uses their professional expertise to make decisions on investing in commercial and possibly residential property using
investors’ money
PROPERTY
Real Estate Investment Trusts (REITS)
Money is generated via the rental and disposal (sale)of the property held in the REIT
Buy shares
In the REIT
Via a stock
exchange
Gains paid to
shareholders
Investors

6. Advantages of indirect investment in property over direct investment
In groups, make a list of the advantages which indirect investment in property (via REITs) holds over direct investment in property.
Diversify the risk of holding direct investments in property
Removes the liquidity risk associated with direct investment in property
Enables investment in commercial property with relatively small sums of money
Gains access to professional property investment
Avoids double taxation
Investors

7. Real Estate Investment Trusts (REITs)
Tax Rules
Provided that 90% of the income (after expenses) is distributed to shareholders, REITs pay no corporation tax on property income (i.e. rentals), nor capital gains tax on property disposals
When income distributions are handed to investors, they are then taxed in the normal way, as if the investor had received the property income directly.
It is not taxed as a dividend. This avoids double taxation
REITs can be held within ISAs and Self-Invested Personal Pension Plans (SIPPs)
REITS are quoted on the LSE and have been available in the UK since January 2007

8. “Trading at a discount”
Pricing, Discounts and Premiums
The price of shares in investment trusts are not based on the net asset value of the underlying investments like an OEIC.
“Trading at a premium”
This is when shares in an investment trust are trading above the net asset value
Net Asset Value (NAV)
“Trading at a discount”
This is when shares in an investment trust are trading below the net asset value
Generally, most investment trust company shares trade a discount. The extent of the discount is calculated daily and is shown in the business pages of most newspapers

9. Pricing, Discounts and Premiums
Activity
Three scenarios involving the pricing of investment trusts are set-out on your worksheet. Attempt to answer the questions by:
Identifying whether the shares in each example are trading at a premium or discount to the Net Asset Value.
Calculating the percentage premium or discount in each example.
If you finish, attempt the extension questions over the page.

10. Comparing Collective Investment schemes
Authorised Unit Trusts
OEICs
Investment Trust/REITs
Legal Structure
Trust
Company
Management
Authorised Manager
Authorised Corporate Director
Board of Directors
Supervision
Trustee
Depository
Regulation
FCA
UK Listing Authority
Open or Closed-ended
Open
Closed
Pricing
Single or Dual-priced
Dependent on demand and supply
Trading
Stock Market
Settlement
CREST