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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Investment Companies have been in existence since the 19th century. Foreign & Colonial. IT was launched in 1868 while UTs first appeared in the 1930s.
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.
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.
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.
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.
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.
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.