Investment Trust Savings Schemes: How Do They Work?

An investment trust savings scheme is a way to invest in a variety of different companies. By buying shares in an investment trust, you become a shareholder, which gives you the right to vote on how it is run. Investment trusts are public limited companies that aim to make money by investing in other companies. They are run by an independent board of directors elected by shareholders to monitor the performance of the company and protect shareholder interests. The board chooses a professional portfolio manager to manage the company's investments. Investment trusts are no more complicated for clients to understand than a unit trust, and they give investors access to a wide range of investments that may be too complicated or costly to manage as a directly held portfolio.

Investment trusts are public limited companies

As shareholders, investors in investment trusts have a say in how the company is run and can vote at Annual General Meetings (AGMs). They can buy shares in an investment trust via a stockbroker or an online platform, and these shares can be held in an Individual Savings Account (ISA) or New ISA (NISA), offering favourable tax treatment. It is important to note that investing in shares comes with risks, as the value of investments can decrease as well as increase.

Investment trusts differ from other financial products, such as unit trusts, as they can take a long-term view and borrow money to gain greater exposure to stock markets, potentially leading to higher returns. They can also retain a portion of their revenue to maintain consistent dividend payouts during challenging market periods. However, it is worth mentioning that not all investment trusts can build up these reserves, and even with surplus income, it may not be sufficient to cover extended periods of poor market performance.

Overall, investment trusts provide investors with access to a diverse range of investments, making them an attractive option for those seeking to grow their wealth over the long term.

Shareholders elect an independent board of directors

Shareholders elect the board of directors, who are responsible for overseeing and advising the company to ensure effective and efficient functioning. The board is made up of inside and outside directors, with the latter being only involved with the company through their board membership. Outside directors are invaluable as they bring different points of view and expertise, and they face fewer conflicts of interest.

The board of directors is particularly important for investment trusts as they act as "independent watchdogs", overseeing the fund's operations and protecting the interests of shareholders. This is due to the unique structure of investment companies, where conflicts of interest can arise between the fund and its investment adviser. The investment adviser's interest in maximising profits may conflict with their duty to act in the best interests of the fund and its shareholders.

The board of directors is responsible for:

• Setting strategy and objectives
• Overseeing management
• Protecting the interests of shareholders and stakeholders
• Making key decisions on issues such as mergers and acquisitions, and the hiring and firing of senior executives
• Ensuring the company operates lawfully and in the interests of shareholders and stakeholders
• Monitoring and managing risk
• Engaging with stakeholders

The board of directors is elected by shareholders, with candidates nominated by the company's nominating committee or by investors seeking change. For private companies, the board can be chosen according to the company's bylaws or articles of incorporation, or via shareholder agreement.

The number of board members is not set, but many companies opt for a range of five to ten directors. Some boards require an uneven number of members to prevent tied votes.

The Benefits of an Independent Board of Directors

An independent board of directors brings a multitude of benefits to a company, including:

• Advice
• Counsel
• Relationships
• Experience
• Accountability

Trustees choose a professional portfolio manager

Portfolio managers, or fund managers, are the individuals responsible for choosing the shares and other asset classes to buy and sell. They will work to a clear set of rules and must be held accountable for their decisions. They are also known as investment advisers, and their role is to provide financial advice and support to clients.

When choosing a portfolio manager, it is essential to select a qualified and experienced professional who understands the market and can make informed decisions. They should have a proven track record of success and be able to provide expert market insights and guidance.

The portfolio manager will work closely with the Board of Directors, who are responsible for overseeing the trust and protecting investors' interests. The Board ensures that the portfolio manager acts in the best interests of the investors and reports to shareholders. This collaboration between the portfolio manager and the Board of Directors helps to ensure that the investment trust is well-managed and that investors' funds are handled effectively.

Overall, the selection of a professional portfolio manager is a critical aspect of the investment trust's success, and it is a decision that requires careful consideration and expertise.

Investment trusts can borrow money

An investment trust is a legal entity that holds property and assets and can provide financial, tax, and legal protections. A grantor sets it up and funds it with money or assets. One or more beneficiaries receive the assets under specified terms.

A trustee may need to borrow money to fulfil their fiduciary duties. There are several reasons why a trustee would want or need to borrow money against the trust assets, all with the ultimate goal of ensuring the trust's objectives are met and the beneficiaries' interests are served.

For example, a trustee may choose to borrow against trust assets to pay for deferred maintenance on a trust-owned property, or to prepare a property for sale. They may also borrow to facilitate a sibling buyout, where one beneficiary buys out the interests of other beneficiaries in a trust-owned property.

In the case of borrowing against an irrevocable trust, the successor trustee will need to apply for and sign the loan documents. Conventional lenders are generally unable to lend to an irrevocable trust. Instead, private lenders make short-term loans directly to the trust, using trust-owned real estate as collateral.

It is important to note that while a trustee can borrow from a trust, they must always act in accordance with the terms of the trust and in the best interest of the beneficiaries.

Investment trusts can retain revenue

Investment trusts are a form of investment fund that are constituted as public limited companies. They are mostly found in the United Kingdom and Japan. Investment trusts can hold a variety of assets, including listed equities, government/corporate bonds, real estate, and private companies.

Investment trusts are closed-ended funds that issue a fixed number of shares at launch. This allows them to take a long-term view and borrow money to increase their exposure to stock markets, potentially leading to higher returns. As closed-ended funds, investment trusts can retain up to 15% of any income they earn. This ability to retain revenue sets investment trusts apart from open-ended funds, which are unable to hold back cash for distribution during challenging market conditions.

By retaining a portion of their revenue, investment trusts can maintain consistent dividend pay-outs to their shareholders, even when markets are performing poorly. However, it is important to note that not all investment trusts are able to build up significant reserves, and even surplus income may not be sufficient to cover prolonged periods of poor market performance.

The ability to retain revenue is a key advantage of investment trusts. This feature provides them with greater flexibility in managing their cash flows and enables them to smooth out dividend payments over time, benefiting both the trust and its investors.

Frequently asked questions