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.
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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.