10 Differences between investment trusts and unit trusts

By Danny Cox on Wednesday, 7 May 2014 at 15:16
Article from http://www.everyinvestor.co.uk

Here are 10 facts for investors to bear in mind when researching funds

1)    Closed-ended rather than open-ended

Investment trusts are ‘closed-ended’ investments, usually with a fixed number of shares in issue. This effectively means investment trust managers have a fixed pool of money to invest, unlike unit trusts that create or cancel units depending on demand, depending upon whether money is flowing into or out of the fund.

2)     Premiums/discounts

A consequence of being ‘closed-ended’ is that the price of an investment trust is driven by supply and demand. If a trust is popular with investors, its price can be driven higher than its net asset value (NAV) – the value of the underlying investments. This is known as trading at a premium. Conversely if supply exceeds demand the price can be driven lower than the NAV – known as trading at a discount. This is in contrast to unit trusts and open-ended investment companies (OEICs), whose price is solely dictated by the NAV.

3)    Pricing

Shares in investment trusts are traded on the London Stock Exchange and the price will vary throughout the trading day. Unit trusts/OEICs are valued once a day, in most cases at 12.00 noon.

4)    Exposure to areas not covered by unit trusts

The closed-ended structure makes it easier for investment trusts to focus on less well-known and niche areas, where investments can be harder to buy and sell in large quantities. Examples include trusts that invest in private equity, property, or more obscure stock markets such as those in developing countries.

5)   Gearing

Investment trust managers have the flexibility to borrow money in order to purchase investments – this is referred to as ‘gearing’. If the total assets of a trust are worth £100 million, and the manager borrows £10 million, this is expressed as 110% gearing. This can enhance returns if the manager makes the right decisions, but magnify losses if the opposite were true. The increased risk plus the cost of borrowing the money need to be factored in.

6)    Performance

In a rising market, as we have seen over the past five years, gearing can help generate superior returns for investment trusts compared to unit trusts as the manager has more capital invested in the stock market. However, during 2008′s crisis, heavily geared investment trusts suffered significantly higher losses than comparable unit trusts, which do not use gearing.

7)    Smoothed dividends

Investment trust managers can hold back up to 15% of the income generated by the underlying investments each year. This creates a cash reserve that can be used to boost dividends in tougher times. Trusts that use this facility therefore often have more consistent dividend records – in some cases delivering many consecutive years of dividend growth for their investors.

8)    Choice

There are approximately 400 investment trusts compared to around 2,500 unit trusts/OEICS.

9)    Charges

Investment trusts and unit trusts carry similar charging structures, but investment trusts are more likely to have performance fees.

10)   Information

Knowing a fund or trust’s underlying holdings is a key factor when analysing and deciding whether to invest. This information is usually widely available from unit trusts and some larger investment trusts. However, it is not always readily available from smaller trusts.

Danny Cox on Wednesday, 7 May 2014 at 15:16
Article from http://www.everyinvestor.co.uk

How to invest in funds, investment trusts and ETFs - and save money as a DIY investor

By Simon Lambert
CREATED: 12:36 GMT, 13 January 2010 UPDATED: 09:09 GMT, 14 April 2014
Article from http://www.thisismoney.co.uk/money/

Investing in funds is the route often recommended to small investors by the experts - allowing them to

pool their money with others to access a range of investments and avoid putting all their eggs in one basket.

There are a variety of ways to do this, from the most popular 'fund' options, to investment trusts and exchange traded funds.

Some tap into professional's expertise while others simply track a certain index, some follow popular markets while others allow access to obscure and adventurous corners of the world.

We explain what funds are, how to invest, and how to save money by becoming a DIY investor and using a fund supermarket or platform.

What are funds?

When investors talk about funds they are typically referring to either unit trusts, or open-ended investment companies, Oeics.

These may sound complicated but they are essentially just funds where investors' money is pooled to invest in shares, bonds or other funds.

The idea is that as the fund invests in lots of different companies' shares or bonds, the risk of you losing all your money is less than it would be if you were in a single company's shares.

Similarly, most funds will have a fund manager. This will be someone, typically with substantial investing expertise and experience, who will aim to beat the market and provide the best return for investors (although, often they do not manage to do so.)

When times are good a fund manager aims to do make higher gains than their peers, when times are bad a good manager will come into their own by continuing to make money, or just not losing as much as their peers.

Investors have to make a minimum investment, usually £500 to £1,000 to access a fund, and their investment will either go up or down in value depending on how the fund has performed.

Investment funds, the typical term for Oeics and unit trusts, carry two sets of charges - an initial charge, which can take a chunk of your money when you put it in, and annual management charges, which go towards the cost of paying the fund manager and running the fund.

Initial charges can be up to 5 per cent but are easily avoidable through a good broker or platform. You do not want to be paying these. Annual management charges vary, but have traditionally been around 1.5 per cent with half of that going to financial advisers and platforms that sold the fund.

This is changing due to new financial regulations stopping these payments and new clean funds have been brought in, which typically charge 0.75 per cent to 1 per cent and pay no commission back to advisers or platforms

Investment trusts have typically had lower charges and did not pay any commission to advisers or platforms.

Annual management charges are taken from your investment every year and act as a drag on its performance.

The annual management charge is not the true cost of investing, however, a closer estimate is the total expense ratio or its replacement measure ongoing charges.

A good DIY fund or Isa investing platform will slash these charges [Read more: The best (& cheapest) Isa investing platforms]

The best way to invest is through an Isa wrapper which shields your investments and their growth from the taxman.

Passive or active funds

To complicate matters funds are typically divided into two categories active and passive.

Around one in four funds is passive, there is no stock picking involved, it simply buys the shares or market represented and therefore tracks it, ie a fund that mirrors the FTSE 100 and will deliver the same returns as that market.

An active fund on the other hand has a manager buying and selling assets, attempting to beat the market.

Some tracker funds are far more sophisticated than others. For example, Vanguard's LifeStrategy range and rivals allow investors to choose their risk levels and then buys a basket of assets that suits them, across shares and bonds around the world.

The advantage of a passive fund is that it is cheaper. These generally take two forms, either a tracker fund bought and sold in the same way managed funds are, or an Exchange Traded Fund, bought and sold in the same way shares are.

This low cost investing has become increasingly popular in recent years, especially ETFs which offer the chance to trade anything from the FTSE 100 and gold, to coffee beans and cotton.The more exotic the ETF the higher charges are likely to be.

Fund managers will tell you that the advantage of an active fund is their expertise, however, you actually have to choose the right manager to benefit from this, many actually consistently fail to beat their benchmark and still levy their fees - a handful do actually outperform year after year.

There is plenty of debate as to which side of the active vs passive argument is right.

Choosing a fund

There are thousands of funds to choose from and they are divided into different types or sectors. You can buy funds that invest in shares, corporate bonds, gilts, commodities and property, among other things, they will also typically have some form of geographical focus.

The wealth of choice means investors can target any theme they choose but can also make picking one baffling. If you are unsure of how to invest speak to an independent financial adviser

If you are comfortable going it alone, our expert fund tips provide some pointers.

Buying funds and investment trusts

If you go direct to the fund company, you'll lose up to 5% of your investment as an initial charge, that makes this one of the areas of a life where a middleman pays off.

A financial adviser can help - but you must now pay them for their time either through an upfront fee, hourly rate or percentage of your investments, which for many small investors may prove overly expensive.

If you don't want help from a financial adviser, it is cheaper and easier to go through a DIY investing platform or an 'execution-only' broker, who does not give advice. They can provide access to funds, investment trusts and ETFs.

The best way to invest is through an Isa wrapper which shields your investments and their growth from the taxman

This may sound complicated but is actually simple. Once you identify your chosen platform, you can go open an account with them, pick your investments and choose to fund them with a lump sum, regular investments or both.

Platforms are easy to use, the best have helpful customer service on the end of the phone and you can manage your investments online.

What about investment trusts?

Investment trusts are less common and have not tended to be recommended as often by advisers as they do not pay them commission.

The crucial difference between them and funds is that investment trusts are listed companies with shares that trade on the stockmarket.

They invest in the shares of other companies and are known as closed end, meaning the number of shares or units the trust's portfolio is divided into is limited. Investors can buy or sell these units to join or leave the fund, but new money outside this pool cannot be raised without formally issuing new shares.

Investment trusts can be riskier than unit trusts because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value.

For example, a trust's price can fall below the total value of its holdings, if it is unpopular and people do not want to invest but do want to sell, thus pushing down demand and driving up the supply of its units for sale. This gives new investors the opportunity to buy in at a discount, but means existing investors holdings are worth less than they should be.

Investment trusts tend to be a lower cost option than funds, with no initial charge and lower annual fees, however, buying incurs share-dealing charges, again a good DIY investment platform will cut these.

Research has show that investment trusts have in many cases delivered better performance than funds over time. Investors should be aware, however, that buying investment trusts can carry more risk.

Firstly, the share price at which you can sell out could fall to a level below the value of what the trust holds, whereas an open-ended fund's price always reflects that underlying value. Secondly, investment trusts can borrow to boost returns, under a process known as gearing, when times are good this can deliver market beating returns but when share prices fall it can spell a bigger dip in an investment trust's value.

There is an added advantage to investment trusts, however, in that if markets fall and investors rush for the exit they are not forced to sell assets at unattractive prices to let them redeem their investment, as an open-ended fund would need to.

Instead, an investment trust can opt to sit tight and ride out the storm and those who want to sell out will simply find the market between buyers and sellers sets the price of their shares in the trust.

Simon Lambert
CREATED: 12:36 GMT, 13 January 2010 UPDATED: 09:09 GMT, 14 April 2014
Article from http://www.thisismoney.co.uk/money/

Investment trusts or unit trusts – what's your Isa money on?

Investment trusts have been shunned by financial advisers for years, but with lower costs and higher returns, what's not to like?

David Prosser

The Observer, Sunday 23 March 2014   

From http://www.theguardian.com/money/

Given a choice of two investments for your Isa, would you pick the high-performing, low-cost option or the more expensive fund with higher charges? That might seem a silly question, but for decades, sales of unit trusts have outstripped those of investment trusts that boast superior returns and lower charges.

Unit trusts have typically been the preferred option of financial advisers. However, this has started to change following an overhaul of investment charges, snappily titled the "retail distribution review", since January 2013. This banned investment companies from paying commission to financial advisers recommending their products, something investment trust providers have never been allowed to do. Research by the Association of Investment Companies suggests there has been a 53% increase in purchases of investment trusts through financial advisers since the changes.

The trend is likely to accelerate, says John Ditchfield of independent financial adviser (IFA) Barchester Green Investment. "The appeal of investment trusts has been demonstrated consistently in performance terms, and now that commission has been banned on all of these products, they will receive more attention."

What are investment trusts?

Both unit and investment trusts are run by a professional manager who picks and chooses a portfolio of assets on behalf of investors – these might include company shares, bonds, or property. Often, a fund manager may run both unit trusts and investment trusts with similar aims and almost identical portfolios.

Investment trusts are listed companies that issue a fixed number of shares quoted on a stock market – usually the London Stock Exchange. And as the number of shares is fixed, funds are "closed-ended", so their price is determined by demand and supply in the market – ie the number of investors who want to buy and sell.

Often, demand and supply falls out of line with changes in the value of the assets the investment trust owns. This means that sometimes the trust's share price may trade at a discount to the value of its underlying assets – less commonly, it may trade at a premium.

By contrast, the price of a unit trust always reflects the value of its holdings. When more investors want to buy into the fund than sell, the manager issues more units. When the opposite is true, the manager cancels units.

Advisers have often cited the issue of discounts as adding complexity – and a reason for avoiding investment trusts. However, many investors like the idea of buying exposure to assets at less than face value, even if there is a risk of the discount widening further.

And performance and cost?

Alan Brierley, analyst at stockbroker Canaccord Genuity, regularly compares the performance of similar investment and unit trusts. In 2013 Brierley looked at the five-year performance records of 19 investment trusts and the comparable open-ended fund. In many cases, the two funds were managed by the same person. All but one of the investment trusts came out on top, achieving average annual returns 2.24 percentage points higher than the equivalent open-ended funds.

"This outperformance is underpinned by a number of advantages that give investment trust managers a distinct competitive advantage," Brierley says.

The most obvious is cost. With no need to finance commissions, investment trusts have been able to undercut open-ended funds. Since the retail distribution review, many open-ended funds have begun cutting fees, but even then, investment trusts remain cheaper in most cases.

Another advantage is that investment trusts are free to take on gearing – to borrow additional money to invest. When stock markets are performing well, this provides a boost to returns – and since share prices, at least in the past, have tended to rise strongly over the longer term, gearing has helped investment trusts. However, it also adds risk. When share prices fall, the losses of geared funds are multiplied.

Why don't advisers like them?

Martin Bamford of independent financial adviser Informed Choice says: "Investors are generally best advised to avoid investment trusts because their gearing and their discount or premium pricing structure can both result in losses being magnified."

However, Brierley argues that open-ended funds can change in size quickly and dramatically, particularly during times of market stress or buoyancy, which can cause managers real problems. In extreme circumstances they may have to sell assets at knock-down prices to pay investors who want to leave, or to invest at top-of-the-market prices when new investors join.

In the end, argues Jason Hollands, of independent financial adviser BestInvest, advisers who turn their back on investment trusts are doing their clients a disservice. "In our view, the right approach to building a portfolio is to be agnostic – sometimes the right instruments will be a fund, sometimes a trust."

What to buy and where to buy

Shares in investment trusts can be bought and sold on most of the large online platforms, or through stockbrokers. There are likely to be dealing charges and platform or intermediary fees, as well as the fund's own charges, so look for the best deal. It's also possible to invest direct with investment trust managers – many offer regular savings schemes and Isas.

"Some of the large global investment trusts are ideal as long-term buy-and-hold pension investments or for children's savings," says Patrick Connolly of independent financial adviser Chase de Vere. "My own son's Junior Isa is in the Witan Investment Trust, for example."

Another option popular with investment trust specialists looking for funds investing all around the word is Edinburgh Worldwide, run by a team at Scottish fund manager Baillie Gifford that has also enjoyed excellent results with its range of open-ended funds.

For investors looking for a UK specialist, it is worth considering Perpetual Income and Growth. More specialist investment trust options include funds that buy illiquid assets, such as infrastructure and private equity, where open-ended funds' fluctuating size makes investment much less practical.

David Prosser
The Observer, Sunday 23 March 2014   
From http://www.theguardian.com/money/

Gen X to be worse off than Boomers in retirement, study finds

By Melanie Hicken @melhicken May 17, 2013: 12:39 AM ET
Article from http://money.cnn.com/2013/

NEW YORK (CNNMoney)

Boomers lost a significant chunk of their retirement nest eggs in the recession, but it was members of Generation X who were really hit the hardest, according to a report released Thursday.

If they don't start paying off debt and saving more, Gen Xers (those between the ages of 38 and 47) and younger Boomers (those in their late 40s to mid-50s) are on track to retire financially worse off than the generations before them, according to analysis from the Pew Charitable Trusts, a Washington, D.C.-based nonprofit.

"Many younger Americans were already behind in saving for retirement, and suddenly millions of them were out of work or owned homes worth far less than they had been just a few years earlier," the report said.

Including Social Security benefits, Gen Xers are projected to have enough money in retirement to replace only half of their annual pre-retirement earnings. Financial planners recommend retirement savers aim to replace 70% to 100% of pre-retirement income.

Between 2007 and 2010, members of Gen X saw their median net worth sink 45% from $75,077 to $41,600. That's compared to a drop of around 25% for both younger Baby Boomers and older Boomers, between the ages 58 and 67.

By the end of the recession, Gen X held investments, retirement plans and savings with a median value of just $14,500, down from $19,382 in 2007. Younger Boomers had median savings of $32,135 and older Boomers had $55,850, according to the report.

Money 101: Planning for retirement

And while only two-thirds of Gen Xers owned homes in 2010, those who did saw their median home equity plummet by 27% during the past three years, Pew said. In comparison, the home equity of younger Baby Boomers fell 14%, and older Boomers saw a 22% drop.

Gen Xers were also plagued by significantly higher debt levels, including mortgages, auto loans, credit card and student loan debt -- much of which was accumulated in the years leading up to the recession. In 2010, Gen X had a median debt level of more than $80,000, while younger Baby Boomers carried about $60,000 and older Boomers had less than $40,000.

Younger Boomers, between 48 and 57 years old, are slightly better off with a median expected income replacement rate of about 60%, although it pales in comparison to the roughly 80% projected for their older counterparts.

"Unless this path is altered, younger Baby Boomers and Gen Xers may face a real possibility of downward mobility in their Golden Years," said Diana Elliott, research manager for Pew's economic mobility project.

Pew's study did not look at retirement security for anyone born after 1975, which leaves out the youngest Gen Xers and Generation Y, also commonly dubbed the "Millennials," who were born between the early 1980s and early 2000s. The country's youngest workers, who are saddled with historic levels of student loan debt and are starting their careers in an unfriendly job market, likely face similar levels of retirement insecurity.  

First Published: May 16, 2013: 8:58 PM ET
Melanie Hicken @melhicken May 17, 2013: 12:39 AM ET
Article from http://money.cnn.com/2013/