Both investment trusts and open-ended funds offer practical and affordable ways to gain exposure to a wide range of assets and investment strategies.
Investment trusts are limited companies that invest their capital in other businesses; their shares are traded like those of any other public company. They are the original stock market collective investment schemes, with some dating back to the 19th century.
Open-ended funds are investment vehicles designed to allow multiple investors to pool their capital to gain investment exposure to other assets. They come in many different forms including unit trusts, open-ended investment companies (Oeics) and exchange-traded funds (ETFs). The difference with these investment vehicles being that unit trusts are legally structured as ‘trusts’, Oeics are similar to unit trusts but structured as unlisted companies, while ETFs are investment companies that trade on stock exchanges and typically track a market index or some other type of benchmark. See Table 1 for a comparison of these investment vehicles.
In some cases, an investment manager may run both open-ended funds and investment trusts with similar aims and almost identical underlying investments.
Structural differences
Open-ended funds create new shares (or ‘units’) when investors subscribe to them. Conversely, they cancel shares when investors sell their holdings. There is no limit on the amount of shares they can issue. If an investor sells a large amount of shares in a fund, it may have to liquidate some of its underlying investments in order to pay the seller. There have been instances when successful funds have been closed to new investment as they have become too large for their investment strategy to be implemented effectively.
Investment trusts are closed-ended companies that sell a fixed number of shares at an initial public offering. The shares are subsequently traded on an exchange. This means that the underlying value of the fund does not change as shares are bought and sold between investors. The size of the fund is a function of the initial capital subscribed and any subsequent profits or losses it may have incurred.
Price differences
The pricing of shares in investment trusts is governed by supply and demand. As a result, the price of a trust may trade at a premium or a discount to the sum of the value of its underlying investments. When share prices are rising, investment trusts generally trade at a premium to this value. However, in normal market conditions they often trade at a discount as a result of various factors, including the fees of the investment manager.
Open-ended funds can be priced in different ways depending on their structure, but their pricing always reflects the mark-to-market value of their underlying assets. Unlike investment trusts, the value of both unit trusts and Oeics are determined at regular intervals (normally daily).
Fee differences
Both investment trusts and open-ended funds are similar in terms of cost, with annual management charges typically ranging from 0.5 per cent to 1.5 per cent. However, unit trust investors may also have to pay an initial charge (as a percentage of the amount invested) to cover the costs incurred when purchasing assets for the fund as well as any other administration fees.
