Types of Investment Trust

Depending on the level of risk you are comfortable with and the type of return you are looking for, there are various investment trust options.

Conventional investment trusts
Unlike split capital trusts, conventional investment trusts issue only one class of ordinary share. Depending on the trust's objectives, these usually give shareholders a right to dividends and the opportunity to increase the value of their investment. Conventional investment trusts vary greatly and may be designed to provide you with income, growth or a combination of both. The trusts also come in various sizes making them suitable for anything from a core investment to an addition to your existing portfolio.

Some conventional investment trusts are what's called a 'fund of funds' and invest in other investment trusts, which means they take advantage of another layer of investing expertise (the fund managers in those investment trusts). This can give good results, but the disadvantage is that you may be exposed to additional layers of operating costs and gearing. They may also invest in trusts trading at a discount, when they think this represents a good buying opportunity.

Split capital investment trusts
Split capital investment trusts - or 'splits' - are more complicated types of investment trusts. Splits are companies with a portfolio of investments just like conventional trusts, but they issue two or more different types of share. Each type of share has different rights to participate in income and capital returns from the trust's portfolio enabling investors to get both from the same trust if they choose to. Splits can be useful if you need a return over a fixed period.

Zeros
Zero dividend preference shares - 'zeros' - have a limited life. They do not provide income but are set up with the aim of delivering a pre-determined capital return to investors when the wind up date is reached. This is called the redemption value. A zero's rate of growth is also pre-determined by the trust at launch. This means that even if the trust performs better than expected, zeros still only pay the amount set at launch date. Although the redemption value may be pre-determined, this is not a guaranteed return, if the trust performs poorly, the company may not be able to pay out the pre-determined amount. It is crucial to be aware that you may make less of a profit than you expected or even lose part or all of your money.

Income shares
Income shares aim to provide shareholders with regular returns in the form of share dividends generated from the trust's investment activities. Some income shares also have entitlements to some of the trust's capital on wind-up. Any capital entitlement is usually pre-determined by the trust, in other words, it will not be more than a fixed amount, although it could be less. There is no guarantee that you will receive the pre-determined amount if the trust performs poorly.

Ordinary income shares
Ordinary income shares combine the regular dividend payments of income shares, with the prospect of capital growth. On wind-up, ordinary income shares have no pre-determined capital value. This means they are entitled to any surplus assets after prior ranking charges and share classes but they are usually ranked last in the trust's repayment order. This means if the trust does well, ordinary income shareholders are likely to do very well indeed, but if it does badly, they fare very badly. By implication they are higher risk.

Capital shares
Capital shares offer potential for above-average capital growth but at high risk. They pay no income and there.s no cap on the return at wind-up. Capital shares have the last call on the trust's assets at wind-up. These shares are very high risk.