Your guide to investment trusts.We’ll show you an easier way to enjoy greater potential returns.

With their manyattractions, it isperhaps not surprisingthat investment trustsare known as theCity’s best-kept secret.

Investment trusts are one of the oldest forms of investment. The first,Foreign & Colonial Investment Trust, was launched in 1868, but theiraim is still as relevant today – to offer private investors a means ofinvesting in the stock market, whilst reducing the risk by spreadingtheir investment over a wide range of companies.

You may not be familiar with investment trusts yet, but you will findthey offer some unique advantages that make them highly versatilefor most types of investment purpose.

In this guide we aim to explain in simple terms what investment trustsare, their advantages over similar types of investments and how youcan use them in planning your financial affairs.

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Introduction

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An investment trust is a public limitedcompany, like Marks & Spencer for example,and its shares are quoted on the stockmarket. When you invest in an investmenttrust, you therefore become a shareholderin it.

The beauty of an investment trust is that itpools your money with that of otherinvestors and employs professional fundmanagers to invest this money in a widerange of different companies.

This means that even if you only have asmall amount to invest, you can gainexposure, cost-effectively, to a diversifiedand professionally run portfolio of shares.Your risk is also spread much more than ifyou were reliant on the success of just onecompany. If the companies that the fundmanagers invest in do well, the value of theinvestment trust will grow, and so should thevalue of the shares you own in it.

As well as investing in companies both inthe UK and abroad, investment trusts caninvest in property, bonds and cash.

Investment trusts are different from bankand building society accounts in that theycan go down in value as well as up, which ispart of the nature of a stock marketinvestment. This means you may not getback the amount you invest. If you are notwilling to accept any risk in exchange for agreater potential return, you might be betterto keep your savings in a bank or buildingsociety where your capital is safe.

What is an investment trust?

History of investment trusts

Investment trusts have a long history,being invented as a way for industrialiststo raise capital in the boom years of the19th century.

They were used “by the jute weavers ofDundee, the lawyers and architects ofEdinburgh, and the financiers andrailway barons of London to fund muchof the infrastructure of the UnitedStates, Canada, Argentina andelsewhere.”*

Projects funded ranged from thebuilding of the American railroads,rubber plantations in Malaysia, cattleranching across Canada and the UnitedStates and the laying of underseatelegraph cables, to gold and silvermining and land development inArgentina.

*‘Put not your trust in money’,John Newlands, 1997.

“You can gain exposure, cost-effectively,to a diversified and professionally runportfolio of shares.”

In a nutshell, it’s a company which invests in the shares of other companies.

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Whatever your plans for the future,investment trusts can provide a low costand flexible way to invest.

First time investors – a global trust canbe an ideal first investment, as long asyou can commit the money for at leastfive years. It provides an instant spread ofrisk across some of the major worldstock markets.

Going for growth – if you are a youngerinvestor, you could look at a specialisttrust that focuses on growth, such asone investing in emerging markets. Withlonger-term investment horizons, you canafford to ride out some shorter term upsand downs from a more risky, volatilefund that has the potential for higherrewards over the longer term.

Are you looking ahead to your retirement? Want to build up a fund for a holiday of a lifetime,or to help pay off your mortgage early? Or want to invest for your children or grandchildren?

Investing for income – income-payingtrusts can be a sensible choice if you areapproaching retirement or already retiredand would like to supplement yourpension. Over time, the income fromthese trusts has the potential to outpaceinflation.

Saving for retirement – you can invest inan investment trust through a personalpension or self-invested personal pension(SIPP). The type of trust you choose willdepend on how close you are toretirement and how much risk you arewilling to accept.

Investing for children – investing nowfor a child could give them a better startin life in the years ahead. It’s temptingand easy to put the money in a bank orbuilding society account. But with a timespan of up to 18 years, you might decideit’s worth taking more risk as the rewardscould be much greater. You can invest ininvestment trusts through theGovernment’s Child Trust Fund.

How can investment trusts help you?

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Rewarding performance figuresOne of the most attractive features ofinvestment trusts is their impressiveperformance. For example, £5,000 investedinto the average investment trust 10 yearsago would have grown to £9,114,compared to £7,096 in the average Open-Ended Investment Company (OEIC) and just£6,489 in an average savings account.Source: Lipper Hindsight.

Past performance is not a guide to futureperformance. Stock market and currencymovements may cause the value of aninvestment and the income from it to fall aswell as rise and you may not get back theamount you invested, whereas savings in abank or building society are readilyaccessible and capital and interest, onceearned, is guaranteed.

Independent directorsEvery investment trust has its ownindependent board of directors which setsits investment objective. The board meetsseveral times a year and has a legal duty toact in the interests of the trust’sshareholders. The board makes strategicdecisions such as the level of dividend topay shareholders or choosing theinvestment management company (themanager). Shareholders can attend and voteat Annual General Meetings (AGMs), atwhich the reappointment of individualdirectors is typically voted on.

Professional investmentmanagersThe board appoints the manager to makedecisions regarding which shares to buy andsell. In return, the manager receives a fee.The board monitors the performance of thetrust and if they believe performance is notup to scratch, it can dismiss the managerand replace it with a new one.

What makes an investment trust different?Though similar to other types of collective investments, such as unit trusts and OEICs,investment trusts offer some unique advantages.

Lump sum investment of £5,000, offer to offer, net income reinvested to 31.12.08. Source: Lipper Hindsight. Stock marketand currency movements may cause the value of shares and the income from them to fall as well as rise and investorsmay not realise the original amount invested, whereas savings in a bank or building society are readily accessible andcapital and interest once earned, is guaranteed. Average savings account for a £5,000 investment.

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Low chargesInvestment trusts incur running costs, suchas the fee they pay the manager, dealingcharges when investments are bought orsold, directors’ fees and administration costs.These costs are paid directly by the trust, notfrom investors’ holdings, though they reducethe return you earn on your investment.

Boards review costs to ensure that they arenot excessive and that the interests ofshareholders are looked after. Running costsvary but are typically lower than those of unittrusts or OEICs, which can have an annualfee of 0.5% to 1.5%, plus an initial charge ofup to 5%.

Ability to plan for the long termWhen an investment trust is launched, sharesare issued to investors to raise funds forinvestment. As the number of shares is fixed,the managers know how much they will haveto invest. Investment trusts are thereforeknown as ‘closed-ended’. Unit trusts andOEICs, in contrast, change in size as theycreate or cancel units/shares, depending onwhether investors are buying or selling.

Investment trusts therefore have theadvantage that their managers don’t need tosell investments to meet withdrawals, whichmeans they can invest for the long term withgreater confidence.

Ability to borrowInvestment trusts can borrow money or‘gear’ their portfolios, to make additionalinvestments on top of shareholders’ funds.This enhances performance if returnsexceed the cost of borrowing, and is onereason investment trusts have historicallyoutperformed other collective investmentsover the long term. However, in a fallingmarket, gearing will magnify the negativeimpact on performance.

A summary of investment trust featuresDiversification of risk

Access to many companies through one investment

Independent board

Managed by professional experts

Value for money

Ability to borrow to increase returns

Wide choice of investments around the world

Put together, you have a simple and cost-effective way to investin the stock markets of the world.

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Global generalists – larger trustsinvesting in a wide range of companieson a global basis. Often viewed as a firststep into investment trusts, they providea cost-effective ready-made portfolio.

UK – focusing on UK investments only,they can aim for income, capital growth,or a combination of both.

Country and sector specialists –investing in specific geographical areassuch as the Far East, Europe or LatinAmerica. These are likely to be morevolatile than global trusts, as they don’tinvest as widely, but could providegreater returns. Other trusts may invest insectors such as smaller companies,property and financials.

Split capitals – these offer more thanone type of share, to suit the differingneeds of investors.

What are the main types of investment trust?Each investment trust has an objective; some aim to maximise capital growth,others aim for income. Some may strike a balance between the two.All will clearly specify their investment objective to potential shareholders.

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There are two ways to measure theperformance of an investment trust; its shareprice and its net asset value (NAV).

Share price – is the price at which youwill be able to buy or sell your shares andis determined by supply and demand.

Net asset value (NAV) per share – thisreflects the value of the trust’s portfolio. Itis the value of the trust’s assets, minusany borrowings, divided by the number ofshares issued.

Measuring performanceThe share price might be either below theNAV, in which case it’s described as tradingat a ‘discount’, or above the NAV, in whichcase it’s trading at a ‘premium’. As anexample, if the NAV is 100p and the shareprice is 90p, the trust is trading at a 10%discount. Discounts and premiums vary allthe time, depending on demand for thetrust’s shares. If you buy shares at adiscount, this can be seen as good value formoney, as you are paying less for the sharesthan the value of the underlying assets. If thetrust performs well, demand for its sharesshould rise, which means that the discountmay narrow and your investment should risefaster than any increase in assets. Forexample, if you buy at a 10% discount andsell at no discount, you gain a 10% boost toyour investment performance on top of theunderlying return from the trust’s portfolio.

However, there is always a risk that thediscount can widen further. Plus, manyfactors can influence the discount orpremium, and a large discount does notnecessarily indicate a bargain. Other reasonscan include poor performance, marketsentiment and regard for the fund manager.

PricingIf you buy shares in an investment trust, theprice you pay is the share price quoted onthe stock exchange that day. However, theprice quoted in newspapers or websites onthe day you buy will not necessarily be theone you paid. Newspapers quote the mid-market price, which is the mid-pointbetween the bid price and offer price at theclose of business the previous day.

You can find the share price, NAV anddiscount/premiums of investment trusts inthe Financial Times or at www.theaic.co.uk.

Capital structuresMost investment trusts only issue one typeof share, usually called an ordinary share.Some have a ‘split capital’ structure andissue a number of share classes, each witha different entitlement to the trust’s capitaland income. Each share class is designed toappeal to different investors who havediffering needs.

Investment trusts – more details.Here are some more detailed nuts and bolts if you’d like to know more.

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Direct through a stockbrokerYou can buy investment trust shares, as withall shares, direct from a stock broker. Theywill generally charge you a fixed amountevery time you buy or sell.

Through a managementcompany savings schemeYou can also buy investment trust sharesthrough the company that manages theirassets. Many investment trust boards asktheir managers to operate savings schemeson their behalf, to make it easier forinvestors to buy shares.

Typically you can choose from astraightforward savings scheme, anIndividual Savings Account (ISA) andschemes specifically targeted for parentsand grandparents to invest for children.Minimum investments are usually low andcan start from as little as £25 a month.

These schemes have a number ofadvantages over buying shares directthrough stock brokers:

Cost – some managers do not imposeany charges on top of the trust’sunderlying management fees andgovernment stamp duty. Others maycharge a small annual or transaction fee.Either way, these can work out lowerthan the charges you typically need topay a stock broker.

Convenience of a direct debit – youcan set up a regular monthly direct debitto build your savings up over time.

Automatically reinvest dividends – ifyou do not need an income at themoment, your dividends can beautomatically re-invested for you to buyfurther shares.

Ability to switch – if the companymanages more than one investmenttrust, you can usually switch yourinvestment between the trusts in theirrange at any time.

How can you invest in an investment trust?

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AssetsThe investments held by an investmenttrust.

Bid priceThis is the price that investment trustshares are sold at and is determined bysupply and demand.

Bid/offer spreadThis is the term used to describe thedifference between the offer price and thebid price.

Buy-backsInvestment trusts have the ability tobuyback their shares to improve shareholdervalue – usually to narrow the discount andenhance net asset value. Shareholders willbe asked to vote each year so that the trustcan exercise this right as and when it isdeemed suitable.

Capital structureThe different amounts and types of stocksand shares which make up a trust’s capital –the amount of ordinary and preferenceshares, for example, which are in issue.

Closed-endedA capital structure with a fixed number ofshares. This means that the fund manager

has the freedom to focus on long-terminvestment decisions, as the assets do notneed to be sold to manage inflows oroutflows from the portfolio.

DealingBuying and selling of shares.

DiscountWhen the share price is lower than the netasset value (NAV), it is referred to as tradingat a discount. The discount is expressed asa percentage of the net asset value.

DividendIncome paid to shareholders by thecompany they invest in.

Dividend yieldThe annual dividend income per sharereceived from a company divided by itscurrent share price. Put simply – how muchincome you are getting out of the companyfor the capital you have got locked up in it.

GearingGearing is an investment term for borrowing.Borrowing is used to make furtherinvestments. If assets rise in value, gearingmagnifies the return to shareholders.Correspondingly, if assets fall, gearingmagnifies the fall.

IFAThis term stands for Independent FinancialAdviser and is a person who can providefinancial advice on the most suitableinvestment for you.

Investment trustA public limited company that is listed onthe London Stock Exchange. It exists toinvest in the shares of other companies withthe aim of producing a return for itsshareholders.

ISAAn Individual Savings Account (ISA) offerstax advantages for UK based investors.

Management feeThe charge levied by an investmentcompany to manage the trust’s assets. Itcan be either fixed or percentage based andcan include a performance related fee.

Market capitalisationAn investment trust’s stock market value,calculated by multiplying its share price bythe number of shares in issue.

Net asset value (NAV)Net asset value or NAV is the value of thetotal assets of the trust minus any liabilitiesor borrowings.

Jargon buster.Use this handy glossary to look up any technical jargon you are unfamiliar with.

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Net asset value (NAV) per shareNet asset value divided by the number ofshares in issue.

Offer priceThis is the price that investment trustshares are bought at and is determined bysupply and demand.

Ordinary sharesThe most common type of share issued bycompanies.

PremiumWhen the share price is higher than the netasset value (NAV) it is referred to as tradingat a premium. The premium is expressed asa percentage of the NAV.

Split capital trustsSplit capital trusts have one investmentportfolio but issue various classes of shareswith different entitlements to capital andincome to meet different investmentobjectives and have finite lives. These cancomprise a combination of zero-dividendpreference shares, income shares, capitalshares and ordinary shares.

Stamp dutyA mandatory Government tax imposed onthe buying of shares and property. Currently,buying shares incurs stamp duty at the rateof 0.5%. Stamp duty only applies topurchases, not to sales.

Total expense ratio (TER)The total costs of running an investmenttrust expressed as a percentage of itsassets.

WarrantsThese are a type of security that gives theholder the right to buy shares at a fixed timein the future for a price that is set when thewarrant is issued. If the shares are worthmore than the amount at which the holder isentitled to buy them, they make a gain. Theprice of warrants can be very volatile andyou shouldn’t deal in them unless you fullyunderstand them and the extent of the riskyou take on.

Zero dividend preference sharesA share with no right to receive a dividend.It is entitled instead to a fixed sum onrepayment. These are shares that aim todeliver pre-determined growth.

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Where can you find more information?If you’d like more information on investment trusts,why not take a look at our website:

www.fandc.co.uk

Other sources of information:www.theaic.co.uk The Association of InvestmentCompanies (AIC) is the trade organisation for theinvestment company industry, which includesinvestment trusts. Their website offers detailedperformance statistics, fact sheets on varioustopics, news and fund manager interviews.

www.citywire.co.uk Fund manager ratings,rankings and performance data, news, market data,fact sheets.

www.hemscott.com Investment trust centre,annual reports and brochures, markets, news,portfolio service.

www.trustnet.co.uk/it Daily investment trustprices, performance information, portfolio tool, fundfact sheets, news feed.

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Our website has lots to offer both the first time,and the experienced investor:

Introduction to investingFund pricesFund performanceMarket updatesLiterature libraryReport & accounts

We offer some useful tools:

Fund selector tool – by answering a few simplequestions, it creates a list of options that can besthelp you achieve your investment aims.

Portfolio tracker tool – allows you to retrieve dailyvaluations on all of your investments, including thosenot held with F&C.

F&C Investment ClubImagine how easy it would be to keep up with the financial markets if youreceived email updates giving you the latest news, insight and expertopinions from leading fund managers. With the F&C Investment Club

– you don’t have to imagine.

To join just log ontowww.fandc.co.uk/club

and follow the on-screen prompts.

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Well over a hundred years later, we areproud to be one of the largest investmenttrust managers in the UK. We have alsocontinued to build on our innovativepedigree; we launched the first investmenttrust savings scheme and remain one of thefew investment trust managers to offer aChild Trust Fund.

We offer a number of products which enableyou to invest in investment trusts. Wecannot advise you about the suitability ofinvesting with us (if you want advice youshould speak to an independent financialadviser), but we do have a range ofbrochures that explain our products, and ourInvestor Services team can answer anyquestions you may have.

Why choose F&C investment trusts?F&C has been actively investing to increase the real value of investors’wealth since the launch of Foreign & Colonial Investment Trust in 1868.

Best Investment TrustGroup

Highly CommendedTrust Award 2008

2008

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Gold Standard Award for fundmanagement 2006, 2007 & 2008

Best Children’s InvestmentProvider 2007 & 2008

F&C Private Investor Plan – aflexible, cost-effective way to invest inour investment trusts, with a lumpsum or monthly savings.

F&C Investment Trust ISA – investup to £7,200 tax efficiently each yearwith a lump sum or monthly savings,or transfer an existing ISA to us.

F&C Child Trust Fund – a tax-efficient account for investing the£250 voucher issued by theGovernment to all children born since1 September 2002.

F&C Children’s Investment Plan –an ideal savings plan if you havechildren not eligible for the CTF, or ifyou prefer to top up into a plan whereyou retain control of the money.

F&C Pension Savings Plan – asimple, low cost way to save for yourretirement using investment trusts.

Please contact us for further informationon any of these products.

Phone: 0800 136 420Email: info@fandc.comWeb: www.fandc.co.uk

Best Investment TrustProvider 2008

Rated 3rd overallin the UK, 2008

Contact us.

Call us 0800 136 420 (8am - 6pm, weekdays, calls may be recorded)

Email us at info@fandc.com

Visit www.fandc.co.uk

Please note that we cannot give you any advice on the suitability of investing in our plans.Investors requiring advice on their individual circumstances or if unsure about a financialdecision should consult a financial adviser.

If you have difficulty reading this pack and need a copy in large print, please contact us.If you are deaf or hard of hearing, remember you can use the Typetalk facility.

F&C Management Limited80 George Street, Edinburgh EH2 3BU

F&C Investments and the F&C Investments logo are trademarks of F&C Management Limited. © F&C Management Limited 2009. Issued and approved byF&C Management Limited which is a member of the F&C Asset Management Group and is authorised and regulated by the Financial Services Authority (FSA).Registered Office: Exchange House, Primrose Street, London EC2A 2NY. Registered in England & Wales No 517895.

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