Investment trusts

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4. IT specialisation

Different ITs have different aims, and the most common one relates to whether they are trying to maximise income or capital growth from their investments:

• Income:
  ITs focused on income invest in companies that have a history of paying consistent dividends. The more dividends an IT collects from its investments, the more it can pay out to its own shareholders when it declares its own dividend.
• Capital growth:
  ITs focused on capital growth invest in companies which they think will grow strongly in sales or profits, or whose shares are undervalued. Basically they hope to buy low and sell high. By increasing the value of the trust's underlying assets, they will stimulate a rise in the IT's own share price and hence deliver capital growth to the IT's shareholders.

The aim of an IT is often obvious from its name.

Example

The Aberdeen High Income Trust or the Hill Samuel UK Select Growth Trust

As well as differentiating between income and growth, ITs also specialise by sector, company size and regional exposure.

• Sector-specific ITs confine their investments to companies in a particular industry - technology, for instance, or retailing.
• Size-specific ITs confine their investments to companies of a certain size. Usually this means Smaller Companies and, since small companies rarely pay big dividends, an IT that specialises in Smaller Companies is probably also looking for high capital growth.
• Region-specific ITs confine their investments to particular continents, countries and markets.

ITs will frequently combine all three specialisms and also specialise in either income or growth. To take an extreme example, you might come across an IT called:

Example

'North American Small Cap Biotechnology Capital Growth Trust'

By its name alone, this trust is telling you that it is going to invest its funds in companies of a certain size (small) in a certain sector (biotechnology) in a certain region (North America), and that it doesn't intend to pay out much in the way of dividends because its primary objective is capital growth.

The important point is that by specialising, ITs make it relatively easy for you to gain exposure to particular markets or particular types of company. You choose the one that matches your needs, and hope that it delivers on its promise.

If you don't want exposure to any specific sector, you might consider a Tracker Trust which matches its portfolio to shares in a chosen index (e.g. the FTSE 100) or a 'Fund of Funds' which is an IT that invests in a broad range of other ITs.

The best way to find out what different ITs specialise in is to contact The Association of Investment Trust Companies (AITC) or look at its web site.

The basic rule is that if a trust invests 80% or more in one sector or region then they are placed in the appropriate category.

1. What are investment trusts? 2. What does an IT do? 3. Difference from unit trusts 4. IT specialisation 5. Tax advantages 6. Discounts: the share price of ITs 7. Gearing 8. Split capital trusts 9. Warrants 10. Ways of investing in an IT 11. Factors to consider when choosing an IT 12. Where to find information about ITs 13. Conclusion