A guide to INVESTMENT TRUSTS. We ve been investing successfully since We re on the right course to invest for generations.

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1 A guide to INVESTMENT TRUSTS We ve been investing successfully since We re on the right course to invest for generations.

2 2 A guide to Investment Trusts Contents 3 Investment Trusts explained 4 Differences between Investment Trusts and Open-Ended Funds 5 What are the main features of an Investment Trust? 7 Why consider an Investment Trust? 9 Understanding Alliance Trust PLC 10 Investment Trusts and the Retail Distribution Review 11 Where can I buy? Investing in an Investment Trust gives you access to a wide range of shares, providing exposure to markets across the world through various asset classes. Katherine Garrett-Cox CBE, CEO of Alliance Trust PLC

3 A guide to Investment Trusts 3 Investment Trusts explained Investment Trusts are investment vehicles that are listed on the London Stock Exchange and which invest in shares and other securities. They pool together investors money and delegate responsibility to a professional fund manager to invest in a range of companies from different sectors and regions across the world. They were designed for the investor of moderate means. Investors Investors Investors Investment Trust The fund managers of the Investment Trust invest this money in a portfolio of assets to spread risk. This may include some or all of the following: Over 127 years and beyond Listed shares Debt Cash Other funds The first Investment Trust was launched by Foreign & Colonial in 1868 Investment Trusts made it possible for individual investors to gain diversified exposure to global stock markets Property Private equity Infrastructure Many Investment Trusts were formed in Scotland, including Alliance Trust PLC which was formed over 127 years ago

4 4 A guide to Investment Trusts Differences between Investment Trusts and Open-Ended Funds Investment Trusts are closed-ended funds. This means that there are a fixed number of shares in issue and prospective investors must find an existing holder who is looking to sell and agree a price, as with any publicly listed company. Traditionally this is arranged through a stockbroker or private client investment manager for more information visit the website of the Wealth Management Association (WMA) at These days, there are also a number of execution-only investment platforms (such as Alliance Trust Savings see page 11 for more information) where shares can be bought and sold by investors directly. By contrast the manager of an open-ended fund, often referred to as a Unit Trust or Open-ended Investment Company (OEIC), issues and redeems units to satisfy demand, and can theoretically continue to grow indefinitely, although in practice, there are usually limits put in place. As an Investment Trust is quoted on the London Stock Exchange, its price moves throughout the day and is driven by changes in investor demand. The price will be closely related, but not necessarily identical to the value of the underlying assets in which the Trust is invested, unlike OEICs, where the units are valued at net asset value (NAV) set once a day.

5 A guide to Investment Trusts 5 What are the main features of an Investment Trust? Net asset value (NAV) The net asset value (NAV) is the total market value of all the Trust s investments and assets, minus any liabilities and intangible assets, divided by the number of shares in issue. This is generally published on a daily basis. Discount / premium trading Share price is determined by the stock market The share price of an Investment Trust depends on the supply and demand for its shares in the stock market and so it may be higher or lower than the NAV, creating a premium or discount, see below. Investment Trust shares tend to trade at a discount or premium to its NAV. When the market price of the Trust s shares is worth less than the NAV per share, then the Trust is said to be trading at a discount. When the market price of the Trust s shares is worth more than the NAV per share, then the Trust is said to be trading at a premium. Discounts / premiums can be seen as an indicator of market sentiment towards the stock, an indicator of the manager s ability or a source of untapped wealth for existing shareholders. Market sentiment towards a particular sector may also influence the level of discounts or premiums across the sector. Managers can influence discounts and premiums through performance, raising awareness and through buying back / issuing shares.

6 6 A guide to Investment Trusts What are the main features of an Investment Trust? (continued) Treatment of income Investment Trusts must not retain more than 15% of the total revenue, before expenses, that they generate, meaning that they are required to distribute most, but not all, of their earnings as dividends to their shareholders. The retained earnings can be held in reserve to smooth income distributions in lean years, ensuring a greater consistency of dividend payments than open-ended funds can achieve. An independent board Ability to borrow money (gearing) Investment Trusts are permitted to borrow money and many have borrowings equal to 15-20% of their net assets. This is often referred to as gearing. This tends to help enhance returns in rising markets, but it can increase the volatility of returns and may cause underperformance in falling markets. Investment Trusts are listed companies and therefore have an independent Board of Directors who are responsible for looking after shareholders interests. They decide who will manage the trust and they set the strategy and aims and objectives. It is my role, along with our Board of Directors, to act as a steward on behalf of our shareholders. This means that we are responsible for monitoring the management of the Investment Trust to ensure that our shareholders interests are at the heart of everything we do. Karin Forseke, Chair of Alliance Trust PLC

7 A guide to Investment Trusts 7 Why consider an Investment Trust? Long-term investment horizon Investment Trusts have fixed capital (due to the fixed number of shares), so the fund manager can invest for the long term and plan when to move their money into different investments. This gives them a lot of flexibility. Long-term investment horizon Investment Focus Investment Trusts can invest in illiquid (i.e. products which cannot be bought and sold quickly) investment products such as infrastructure, private equity, property and Venture Capital Trusts (VCTs). Diversification Risk is typically spread over different investments and asset classes. Skilled fund managers Why consider an Investment Trust? Investment focus Before choosing an investment vehicle, make sure you understand its aims and risks. Income consistency Diversification

8 8 A guide to Investment Trusts Why consider an Investment Trust? (continued) Income consistency Investment Trusts accumulate reserves which they distribute to shareholders through dividend payments. Investment Trusts do not have to pay out all of their reserves (unlike OEICs who must distribute 100% of their income). This means that dividend payments are not affected by unexpected shortfalls in the revenue generation of the trust, so managers aim to provide a consistent dividend payment to shareholders. Managers have access to professional resources and industry knowledge about markets and investment opportunities. Skilled fund managers Fund managers are selected by the Board and are experienced in managing pools of money effectively. The managers have access to professional resources and have more industry knowledge about markets and investment opportunities than an individual investor is likely to have. Four companies* in the FTSE All-Share have grown dividends every year for 47 years or more, all of them are Investment Trusts, and one is Alliance Trust PLC. Katherine Garrett-Cox CBE, CEO of Alliance Trust PLC * Source: J.P. Morgan Cazenove

9 A guide to Investment Trusts 9 Understanding Alliance Trust PLC Alliance Trust PLC is one of the oldest and largest generalist Investment Trusts with gross assets of 3.5 billion*. Our shares are traded on the London Stock Exchange and we are one of the largest constituents of the FTSE 250 Index. Most of the companies in which we invest are listed and are companies which we consider have a vision and the capability to grow. We look to invest on a 3-5 year basis and so we are interested in the sustainability of returns and income. Over 95% of the assets of Alliance Trust PLC are managed by our Head of Equities, Peter Michaelis, and his team. The fixed income element, which represents a further 6%, is managed by our Head of Fixed Income, Rod Davidson, with the remainder Peter Michaelis Rod Davidson being made up of property, private equity and our subsidiaries, Alliance Trust Investments and Alliance Trust Savings. Gross Assets are about 12% higher than Net Assets because the Trust has borrowings in place, upon which we paid interest of about 1.9%**. Key Facts Investment Approach: Generalist UK Investment Trust listed on the London Stock Exchange Investment Aim: To generate superior returns over the medium to long term through a combination of capital growth and income Established: 1888 Offices: Dundee, Edinburgh and London Gross Assets: 3.5bn* Managed by: Katherine Garrett-Cox (CEO), Peter Michaelis (Head of Equities) and Rod Davidson (Head of Fixed Income) Ongoing charges ratio: 0.60%** * As at 28 February 2015 ** As at 31 December 2014 Unusually for a company of our size, almost 70% of shares in Alliance Trust are held by private individuals.

10 10 A guide to Investment Trusts Investment Trusts and the Retail Distribution Review The Retail Distribution Review (RDR) is a series of legislative changes put forward by the Financial Conduct Authority (previously the Financial Services Authority) at the beginning of These changes covered the way financial advice is provided in the United Kingdom and covers matters such as training, fees and the definition of independent advice. These changes are good news for the Investment Trust industry. Traditionally, financial advisers have not been incentivised to promote Investment Trusts to their clients because these products do not pay commission. With the change in fee structure (where commission is no longer payable on any investment products and instead the client must pay an hourly fee) advisers are in a better position to look at these products and include these in recommendations to their clients. The changes RDR brings are good news for the Investment Trust industry.

11 A guide to Investment Trusts 11 Where can I buy? There are a number of ways to access shares for Investment Trusts. Below we have detailed some of the more popular methods of buying shares: Through a Stockbroker Via an Independent Financial Adviser Via an Execution Only Platform About Alliance Trust Savings Alliance Trust Savings was formed in 1986, partly to meet the challenges posed by radical changes within the UK savings industry at the time, and partly to offer private investors a cost-effective route into Alliance Trust PLC. Today, it offers private and intermediated investors the ability to manage their investments online through a multiaward winning savings platform. Alliance Trust Savings offers access to a wide range of investment opportunities including: Over 2,100 clean share classes UK equities Whole of market Investment Trusts Exchange Traded Funds Fixed interest These can be held within a range of accounts including: Select SIPP (Self Invested Personal Pension), Stocks & Shares ISA, Investment Dealing Account and Children s accounts (Junior ISA, Child SIPP and First Steps Account). For more information, please visit Please note the value of investments and any income from them can go down as well as up. Your capital is at risk and you may not get back what you originally invested. Investment Trusts may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that a relatively small movement, down or up, in the value of a Trust s assets will result in a magnified movement, in the same direction, of that NAV. This may mean that you could get back nothing at all. Please note that Alliance Trust Savings do not offer advice. Their online tools provide information and guidance to help you make an informed investment decision. If you are unsure about the suitability of an investment, you should speak to your financial adviser.

12 Want to know more? For more information please use the details below to contact us: Tel +44 (0) Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731, registered office, 8 West Marketgait, Dundee DD1 1QN; is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC gives no financial or investment advice. PLC GNR G 0001