Investment trusts explained
What are investment trusts?
Investment trusts – such as TR Property – are vehicles with shares that are traded on a stock exchange. Investors’ money is pooled and invested into carefully selected underlying assets. Different trusts have different aims and strategies – some have very wide remits, while others are more focused.
Investment trusts are overseen by a board of independent directors, who represent the interests of the shareholders and appoint the day-to-day managers of the fund.
About closed-ended trusts
TR Property is a closed-ended investment trust, which means that it has a fixed number of shares, allowing the manager to focus solely on the portfolio and performance. The shares are listed on the London Stock Exchange.
In contrast, the manager of an open-ended fund has to negotiate the ebb-and-flow of investor money which can dictate the timing of the purchase or sale of investments. In extreme conditions, investors have found their money “locked in” to open-ended funds.
Other benefits of closed-ended investment trusts include:
- Cost efficiency
- Regular cash flow for investors
- Independent oversight
- Strategic use of leverage
The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The market value of the shares of TR Property may not reflect the underlying net asset value of the investments held by TR Property. TR Property is able to borrow to raise further funds for investment purposes if the fund manager and the board of directors consider that it may be commercially advantageous to do so. This is generally described as “gearing”. An investment trust which has made investments as a result of gearing may have a more volatile share price as a result; gearing can increase shareholder returns in rising markets but conversely can increase the extent to which the value of the funds attributable to shareholders decreases in falling markets. Please see the Key Information Documents (KIDs) for further details on the risks. If you are in any doubt as to the suitability of an investment, please take professional advice.
Investment Trust FAQs
How do investment trusts like TR Property work?
Investment trusts are public companies that are listed on a stock exchange: TR Property Investment Trust is listed on the London Stock Exchange under the ticker code ‘TRY’.
Investment trusts are one of the oldest types of investment funds. They are available to both professional and non-professional investors. When you buy shares, you become a shareholder in the company.
How does the TR Property share price relate to its net asset value (NAV)?
NAV refers to the value of all the investments the trust holds minus any borrowings. Calculated daily, this is an objective figure and is a good measure of manager performance. The share price will generally relate to NAV, but it is also subject to supply and demand – and the sentiment of other investors.
When an investment trust’s share price is above its NAV, we describe it as trading at a premium. When NAV is higher than the share price, it is trading at a discount. There are potential advantages to both scenarios depending on whether an investor wants to buy or sell, and how long they intend to hold their shares.
What is the difference between a REIT (real estate investment trust) and an investment trust?
REITs are a type of specialist security that TR Property holds within its portfolio. REITs have their own underlying assets and they usually directly own, finance, or operate commercial properties.
TR Property investors will have exposure to REITs, other property securities, as well as physical assets owned directly by the trust. The rules governing REITs and investment trusts are also slightly different.
What is gearing?
Investment trusts have the ability to borrow money in an attempt to enhance returns. This is called gearing, or sometimes, ‘leverage’. This act magnifies both positive returns as well as losses.
Depending on market conditions, TR Property may employ gearing from time-to-time, up to a maximum of 25 percent of the portfolio value. Gearing can reduce returns in some market conditions.
What are tax wrappers?
Two of the most widely-used tax wrappers are Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).
These wrappers are government schemes which allow investors who comply to avoid tax on part or all of their investment returns. There are annual limits on the amount that can be invested (currently £20,000 annually for an ISA).
Most investment trusts – including TR Property – can be held within these wrappers.
How are investment trusts regulated?
All investment trusts, their managers, and board members are regulated by the Financial Conduct Authority (FCA).
UK investment trusts – of which TR Property is an example – are also listed on the London Stock Exchange and so are subject to listing rules established under the Financial Services and Markets Act 2000. They are also subject to the Companies Act.
Index-linked income is a valuable safe haven which is under-appreciated, while real assets should form part of any inflation-proofing in a portfolio. We continue to focus on companies with assets which tenants both need and can afford.
Marcus Phayre-Mudge, fund manager