Unit trust or investment trust?

Question

Hi,

Can anyone explain in simple language what the main differences between the two are, and which one would represent a better investment for someone who would like to make small regular contributions over the long term and prepared to accept a small element of risk.

In addition, what type of fund is good at the moment e.g. trackers, emreging markets, IT etc? There seem to be so many to choose from!

Many thanks

Answer 1

Unit trusts have been changed slightly in the last few years to make them fit European regulations. They are now called OEIC's.

Investment Trusts and OEIC's are both collective investment funds. That means a group of people invest money and the company running the fund employs an investment manager to try and make a profit from this pool of cash by buying and selling assets.

The main difference is the way the share price moves. The share price for an Investment Trust will go up when there are more people buying than selling and down when there are more people selling than buying. The share price for an OEIC will go up when the value of the assets it holds goes up and down when the value of the assets it holds goes down.

In theory when the manager of an Investment Trust does well and increases the value of the assets it should lead to more people buying the shares and the price going up. However that does not always happen and there are dozens of Investment Trusts trading below asset value. That means (for example) you can pay £1.50 per share for a fund that owns assets worth £2.00 per share. Because Investment Trusts are legally companies traded on the London Stock Exchange you occasionally see large investors take a big stake in order to try and force a shareholder vote to sell the assets and distribute the cash to shareholders. Its just another way to make a buck in the market. However most Investment Trusts will trade for years below their asset value with no one showing much interest.

The share price of an OEIC should pretty much reflect the value of its assets. There are many more of them and they are usually much more heavily traded (Investment Trusts are only available in the UK). The only reason not to buy an OEIC would be if you thought you could get in on an undervalued Investment Trust which would subsequently be broken up and the additional value distributed to shareholders. That's a mugs game, most Investment Trusts are just to small to be worth it for the big investors. They continue to trade below asset value for years at a time.

The type of Fund you choose depends on a lot of things. The best advice I can give you is to diversify. Don't put all your money in one place. If you're prepared to take a little risk and can carry in onvesting regularly over a few years you might want to consider something like a managed fund investing in FTSE stocks or even a European fund. Emerging Markets and IT are possibilities, but they are generally considered medium risk.

Good Luck.

Answer 2

I won't try to compete with pope leo's exhaustive answer on the differences. He knows what he's talking about.

In terms of what investment is "good", it all depends what you want. In theory, the current price of any asset reflects everything that is known about it, so all assets are equal in that sense, though of course they have different risk/reward profiles and different likely patterns of return - income funds will give steadier returns, whereas growth funds may grow less in the next couple of years but be worth more in the long term.

Trackers have very low management charges because basically you can set up a palm pilot to manage one - the trading is almost entirely mechanistic as they simply follow the index (or a representative sample of it). They are also relatively low risk (as low as a share investment gets). The downside is that the market generally rewards risk, so the return on trackers is also modest for a share instrument - though that wouldn't have stopped them going up 20% with the market in the last year.

Emerging market funds are relatively risky - not as risky as investing in a single company, but it is quite possible that a country such as Russia, China or India will suffer political instability or hyperinflation and your investment could fall through the floor. On the other hand, this is the kind of area where, if eveything goes well, your investment could be returned many times over (my emerging market funds have doubled in 2-3 years).

Tech stocks are very expensive - but again, that's because they are the future, and some of them will vastly outperform the market. It all depends whether your fund manager makes the right calls. I would say that these types of firms are so heavily marketed that there isn't all that much reward for the risk you're taking, but that's a personal preference.

All funds should be viewed as medium to long term investments (probably 5 years at least), so look at that kind of horizon when you judge what to buy.

BTW, for UK investors, make sure of course that you use your ISA allowance - there's no point letting the government take a fat slice of your profits if you don't have to!

Answer 3

i dont know about the trusts, but dollar cost averaging into a mutual fund might be for you. int'l is still outperforming domestic, large cap is beating small, growth should beat value, and of course stocks over bonds. US large cap growth is highly undervalued. diversify to minimize risk.

Answer 4

a unit trust is a financial product created by a financial
provider and is usually well-regulated-they usually
invest in shares

an investment trust is a company usually quoted on the
market-they invest in public and private companies
some also invest in property

in my experience,investment trusts have lower
management charges

http://www.aitc.co.uk/

i hope that this helps

Answer 5

notice on close ends. they could improve as they permit you to reinvest the dividends/capital features & some even sell new shares each so often. I even have been in ADX PEO & others for 20 yrs. the modifications shouldn't count to you in any respect - in basic terms dig in.