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Real Estate Investment Trust
Investment trusts are companies that invest in
the shares of other companies for the purpose of acting as a
collective investment
Investors' money is pooled together from the sale of a fixed
number of shares a trust issues when it launches. The board will
typically delegate responsibility to a professional fund manager
to invest in the stocks and shares of a wide range of companies
(more than most people could practically invest in themselves).
The investment trust often has no employees, only a board of
directors comprising only non-executive directors. However in
recent years this has started to change, especially with the
emergence of both private equity groups and commercial property
trusts both of which sometimes use investment trusts as a
holding vehicle.
Investment trusts are traded on stock exchanges like other
public companies. The share price does not always reflect the
underlying value of the share portfolio held by the investment
trust. In such cases, the investment trust is referred to as
trading at a discount (or premium) to net asset value.
The investment trust sector, in particular split capital
investment trusts suffered somewhat from around 2000 to 2003
after which creation of a compensation scheme resolved some
problems.
One of the key differences between an investment trust and a
unit trust, is that an investment trust manager is legally
allowed to borrow capital to purchase shares. This leverage may
increase investment gains but also increases investor risk.
Split Capital Investment Trusts
Traditional 'Investment Trusts' normally offer only one type of
share (ordinary shares) and have a limited life. Split Capital
Investment Trusts (Splits) have a more complicated structure.
Splits issue different classes of share to give the investor a
choice of shares to match their needs. Most Splits have a
limited life determined at launch known as the wind-up date.
Typically the life of a Split Capital Trust is five to ten
years.
Every Split Capital Trust will have at least two classes of
share:
In order of (typical) priority and increasing risk
* Zero Dividend Preference shares - no dividends, only capital
growth at a pre-established redemption price (assuming
sufficient assets)
* Income shares - entitled to most (or all) of the income
generated from the assets of a trust until the wind-up date,
with some capital protection
* Annuity Income shares - very high and rising yield, but
virtually no capital protection
* Ordinary Income shares (aka Income & Residual Capital shares)
- a high income and a share of the remaining assets of the trust
after prior ranking shares
* Capital shares - entitled most (or all) of the remaining
assets after prior ranking share classes have been paid; very
high risk
The type of share you invest in is ranked in a predetermined
order of priority, which becomes important when the trust
reaches its wind-up date. If the Split has acquired any debt,
debentures or loan stock, then this is paid out first, before
any shareholders. Next in line to be repaid are Zero Dividend
Preference shares, followed by any Income shares and then
Capital. Although this order of priority is the most common way
shares are paid out at the wind-up date, it may alter slightly
from trust to trust.
Splits may also issue Packaged Units combining certain classes
of share, usually reflecting the share classes in the trust
usually in the same ratio. This makes them essentially the same
investment as an ordinary share in a conventional Investment
Trust
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