Investment Companies
Investment companies are classed as collective investment schemes but have fixed share capital and their shares are quoted on the London Stock Exchange.
Investment Companies Explained
Bestinvest has a firm belief in the benefit of investing via
collective investment schemes and, unlike many investment advisers,
we do not restrict our recommendations to Unit Trusts and OEICs.
Investment Companies can be a more attractive vehicle for investing
in some cases.
Our analysis focuses on gaining an understanding of how the
manager makes the investment selections and assessing whether this
is likely to deliver sustainable outperformance. Investment
Companies are awarded ratings depending on our view of the
fundamental attractions and NOT on the basis of the level of
premium or discount. Three stars or more represent a positive
recommendation.
Before buying or selling an investment trust always check the
level of discount.
Search for Investment
Companies
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History
Investment Companies have been in existence since the 19th
century. Foreign & Colonial. IT was launched in 1868 while UTs
first appeared in the 1930s.
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Structure
Investment Companies are classed as collective investment
schemes but are limited companies with fixed share capital. The
share capital can consist of several different types of shares
although most Investment Companies simply issue ordinary shares.
There is an Annual General Meeting at which all shareholders are
entitled to vote and an independent board of directors, appointed
by shareholders. Most of the recently established Investment
Companies are structured as offshore companies (typically
registered in Guernsey) whereas Investment Trusts are UK
registered. There are no material differences between these
structures as far as shareholders are concerned.
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Pricing
The share prices of Investment Companies are quoted on the
London Stock Exchange (or on AiM) and vary just like the shares of
individual equities. Market makers will quote a Bid price (at which
you can sell) and an Offer price for buyers. The spread between
these varies and can be wide for less liquid shares.
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Discounts
Most Investment Companies trade on a discount to Net Asset Value
('NAV'). This discount is determined by the balance of supply and
demand for the shares. The discount can be affected by many
factors, including the perceived quality of the fund manager, the
popularity of the investment policy and whether there is an active
share buyback policy.
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Volatility
Variations in the discounts of Investment Companies lead to
greater volatility in the share price than with Unit Trusts.
Typically, discounts narrow during rising markets and widen when
prices fall. This effect is usually magnified if an Investment
Company employs gearing.
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Gearing
Unlike Unit Trusts, Investment Companies can gear up in many
ways from straightforward bank loans to issuing preference shares
(e.g. zeros). The effect of this will be to exaggerate investment
returns and increase risks. If an Investment Company has a high
level of gearing there is a risk that a steep decline in the value
of its assets may lead to a default in the terms of its loans and
could lead to a total loss of shareholders funds.
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Advantages
Unlike a Unit Trust, there are no inflows and outflows of money,
so the fund manager can afford to take positions in less liquid
investments such as specialist property investments. This is why
many Investment Companies specialise in esoteric assets such as
venture capital. Investment companies also have an independent
board of directors which monitors the performance of the fund
manager. It has the power to change manager and the investment
mandate if required.