The word “Absolute” is usually in the name of these funds. They are designed so that, hopefully, a return should be attainable whether the market goes up or down. “Obtainable” is much more difficult as actual performance results clearly demonstrate. The Managers of such funds use all kinds of derivatives and similar mechanisms to try and achieve their purpose and their efforts are akin to watered down hedge funds. Only a small percentage of Managers can manage one successfully. We are mindful of Margaret Thatcher’s famous phrase that “you can’t buck the market”. We do not use Absolute funds. They are too speculative. We prefer to go for a Total Return.
Advisory Management Service
We advise you before we take any action on your behalf. This helps to further communication between adviser and client. The alternative is Discretionary Management where the adviser, without any reference to you, can take action on your behalf.
Alternative Investment Market replaced the Unlisted Securities Market and over the Counter Market in 1995. Designed for smaller and younger companies that are likely to be higher risk and have less liquid securities. One interesting fact is that if you hold an AIM stock for over 2 years it does not get included when calculating IHT on your estate.
The annual interest rate on which institutions calculate their lending rates. This is governed by the prevailing interest rate set by the Bank of England.
One basis point is one hundredth of a percentage point or 0.01%. It is often used for expressing movements in interest rates or yields on securities. So, 1% could be noted as 100bp or 100bps.
The owner legally entitled to the economic benefits of ownership. This is often applied to owners whose investments are registered with nominees in a Nominee Account such as you will have with Transact.
The price at which shares are sold.
A bond is a debt investment in which an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company. A government bond (gilt) is a bond issued by a national government denominated in the country’s own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
Rather than receive interest (from cash) or dividends (from shares) a holder of a bond will generally receive a coupon. As there is generally a time limit there will also be a redemption price which will be slightly higher than the original cost.
Naturally, as with any market, there are more complicated bonds than this simple example such as inflation-indexed bonds, corporate bonds that are graded AAA, BB+ etc, municipal bonds etc but the principle is the same. They are generally considered uncorrelated with Equities, although the Liquidity Crisis showed that all assets are linked, by liquidity.
Bottom Up Analysis
A way of assessing the value of a proposed investment starting with company specific data. This is at the micro level and it ignores considerations at the macro economic level (“Top Down”)
Where a company buys its own shares in the market for cancellation. This will tend to enhance earnings per share for the remaining shareholders. It can sometimes be an efficient way to use surplus cash. An investment trust can also hold the shares it buys back in Treasury with a view to selling or re-issuing them at a later date. Buy-Backs are also used as a means to control widening discounts.
Capital Gains Tax is a tax imposed on any capital gain within a tax year. To calculate whether you have a gain it is recommended that you employ the services of an accountant or financial adviser. Basically you can offset any losses in the same year against your gains and there is an exemption that absorbs a specific amount of gain before tax may be payable. If you have submitted losses from previous years you can also offset them against a final net gain.
These are investment trusts and investment companies both of which are limited by the number of shares issued. Unit trusts are “Open-ended” funds where there is no limit to the number of units that may be issued on demand. The only factor in common is that they are known as “Collective Equities” as opposed to “Direct Equities” which are bought and sold separately in the market.
Share prices of investment trusts rarely equal their true value. Value per share is expressed as the Net Asset Value (NAV). The share price is determined by sentiment, and supply and demand in the stock market. The NAV is determined by the basket of investments held in the trust.
The relationship of the share price to the NAV produces either a Discount or Premium to the NAV.
Investment Trusts and Closed-end Companies:
Have a Board. The Fund Manager has to report to the Board and
take his remit from them. Thus the corporate governance around these
trusts is more robust than with a Unit Trust where the Fund Manager
reports to Trustees.
Can borrow money which is referred to as have gearing. This, if used correctly can be a major enhancer to performance and/or income generation. It can, of course, produce the opposite if not controlled correctly.
Do not always cost what they are worth. Value can be had in purchasing a trust at a discount. This will enhance your income as well as capital return as you can purchase more shares for the same amount of money. With Unit Trusts you pay the price they are worth. Discounts can widen and therefore have a negative impact on the growth performance however over the medium to long term this should not be noticeable.
Have the ability to retain 15% of the income received to add to an income reserve that, in times of need, can be dipped into to maintain the dividend paid, or even increase it.
Will not suffer as much if there is a run on the book. If large numbers of holders of a Unit Trust want out the Fund Manager may be forced to sell some of his underlying holdings to bail them out. With Investment Trusts et al there is no need to sell any holdings and the portfolio remains as planned. Equally the Manager will not be forced to buy in at the top price.
Have never paid commission to advisers thus utilising their assets purely for investing. RDR has tried to stop most commission being paid from open-ended trusts to advisers and this may narrow the gap between the two types of funds but that remains to be seen, since Investment Trusts have responded by reducing their fees further.
Dealing is T+1, meaning that if selling your holdings you will have the cash in your account the following day. Unit Trusts can take days.
Where the underlying investments are Property shares, the shareholder is never in a position where the Manager can place a moratorium on the sale of his shares for any fixed period. Compare that with holders of Unit Trusts where this can and does happen to the detriment of the investor when special circumstances arise.
Finally, the Total Expense Ratio or TER is generally lower than open ended funds. On average the difference is about 0.5% to 0.75% depending on the sector.
Sometimes difficult to understand
Requires greater knowledge of actual investment and the markets and effects in investment terms of Discount/Premium & gearing factors
Expert advice should always be sought
1868: The first Investment Trust was formed and is still going today.
1930’s: Unit trusts were invented (we do not deal in them).
1960’s: Splits were created. There were good tax reasons for their existence. Unfortunately, anything overworked to excess in the investment universe is bound, sooner or later, to come to grief e.g. the technology bubble at the top of the last Bull market. Greed, ignorance and excess are deadly partners. The then new entrants into the Splits Sector suffered from all three. The Zeros (sometimes called ZDPs) class of shares suffered the most grief.
Example of discount benefits – suppose that the investments contained in the portfolio of a unit trust are exactly the same as those in its “mirror” investment trust. Illustration figures are:
Investor spends £1,000 and buys 1,000 units @ 100 pence per unit
Unit Price and Value increase to 115 pence
Investor sells @ 115 pence
Sale Proceeds: £1,150
Gain: £150 or + 15%
Investor spends £1,000 but buys 1,111 shares with NAV of 100 pence @ 90 pence, because of a 10% Discount
NAV increases to 115 pence
Share Price Discount narrows to equal par
Share Price now 115 pence
Investor sells @ 115 pence
Sale Proceeds: £1,278
Gain: £278 or + 28%
If the Share Price Discount remained at 10% to NAV, the Share Price would be 103.5 pence, making the sale proceeds £1,150, reducing the gain to £150. The same as the Unit Trust result.
It is also worth noting that because of the discount the investor purchased more shares for his money. Equally he will receive a higher yield, than with a unit trust, as dividends are paid per share.
A warning is that the discount can widen out and produce the opposite effect.
A detailed statement showing the transaction, title of the stock, price, stamp duty and commission for every purchase or sale made.
Real time electronic share settlement system that allows investors to hold their investments in dematerialised form i.e. without a Share Certificate. This system allows for settlement to be made on T (trade date) plus one (day). This means that the proceeds of a share sold by Transact on Monday can be in the client’s portfolio by Tuesday.
A security bought with the right to the recently declared dividend.
Dead Cat Bounce
A term referring to a temporary, yet unsustainable, recovery in the stockmarket following a significant fall. See 2002.
Generic term for Futures and Options that provide the right, but not the obligation, to buy or sell an underlying security at a predetermined price on a predetermined date. Options are generally cash settled and Futures generally have to be settled in physical terms, such as a delivery of wheat.
An event in the affairs of a company that will cause a reduction in the percentage of participation a share has in the interests of the company.
The element of net profits that a company distributes to shareholders. It is expressed as pence per share. The dividends represent the investor’s income.
The dividend as pence per share divided by the current market price.
A security bought without the right to the recently declared dividend. However, you naturally have the right to any future dividends.
FTSE-All Share Index
This is an index on the London Stock Exchange (LSE) that is a capitalisation-weighted index, comprising around 600 of more than 2,000 companies traded on the LSE. It aims to represent at least 98% of the full capital value of all UK companies that qualify as eligible for inclusion. The index base date is 10 April 1962 with a base level of 100.
This term applies to borrowing and also, in Split Capital Trusts, the relationship between one share class and another. Unit Trusts are not allowed by law to borrow.
If terms for the gearing and timing are right, gearing can be used to good effect for adding value. The opposite is also true when the gearing will have an adverse effect on performance and value.
This is one of two main methods of investing. It offers accelerated growth by investing in companies that are expected to grow by the acquisition of other companies. The window of opportunity is normally confined to relatively short periods. If successful, the growth during any period can be exceptional or at least, very good. Such periods exist mainly in periods leading up to the end of Bull markets. Therein, in our opinion, lies the snag. What can go up like a rocket can soon come down like a meteorite. A perfect example is the “dot com” boom at the end of the last Bull market. During the same period there was also Lord Simpson and GEC. Both serve as painful reminders. We do not recommend growth investment alone (it will always have some Value based assets) although that might suit some people.
The Oxford English Dictionary defines investment as being “employment of money in stocks and shares”.
Therefore, Investment is not Savings or Savings Accounts of any kind. Saving characteristics are that the capital is eroded by inflation and the return depends upon the ups and downs of interest rates. Investment is also not gambling or where the return, if there is one at all, depends on chance. It is also not speculation although the distinction between this and investment can sometimes be blurred.
We invest globally in various asset classes that are marketable to produce a Total Return. The aim is to outperform the FT-SE All Share index over rolling periods of 5 years.
The total value of a company’s issued shares calculated by multiplying the number of shares by the share price.
Net Asset Value (NAV)
The total value of the constituents in a closed-end fund after all the liabilities have been accounted for. Normally expressed in pence per share.
The price at which shares are bought.
The nominal value of a security or for a closed-end fund when the share price equals the NAV
Personal Risk Profile
All our investments are risk graded from 2 (low) – 10 (high). We ask all clients to choose their Personal Risk Profiles by this scale following a detailed questionnaire. We then ensure that the overall risk grade of the portfolio matches the Personal Risk Profile chosen by the client. This is continually monitored since higher risk trusts will tend to outperform lower ones and the portfolio slowly becomes riskier.
Plain Vanilla Trust
A term used to describe an investment trust with only one class of share. This will include the vast majority of investment trusts. See Split Capital Investment Trusts for investment trusts with more than one class of share.
Private equity is a specific sector of investment where the Investment Trust invest their money in companies that are not publicly traded on a stock exchange or invest as part of buyouts of publicly traded companies in order to make them private companies. They are generally short-term and due to their nature, they do not publish their NAV daily.
This class of investment is separated into direct property trusts that themselves hold commercial properties generally and trusts that manage a portfolio of shares in companies involved in the property market. We tend to prefer the latter.
Document giving the details that a company is required to make public when there is a new issue of shares.
The average annual return offered by a security (usually a Bond, Zero or Income share in a Split Capital Trust) taking into account not only interest payments, where applicable, but amortisation of any current discount or premium to its redemption value.
The institution (often a bank) responsible for maintaining an up to date register of shareholders, issuing Share Certificates for non-CREST shareholders, paying dividends and handling Company notices.
All purchases bought in any market have a risk attached to them. It is impossible to define what Risk means as it means different things to different people. This is therefore always a variable. Any assessment requires degrees of objectivity and subjectivity. It is too simplistic to think that risk equals volatility. Risk comprises many different aspects to us and all our closed-end funds have been risk graded according to a scale devised a few years back for investment trusts. A Personal Risk Profile, devised by us, is chosen by each client and attributed to their portfolio. Please ask for our document on “Understanding Risk”.
A situation where a trader has sold more shares in a company than he owns (usually borrowed) in expectation of a price fall. He will then plan to cover his position (i.e. to buy the shares he owes at a lower price to make a profit, assuming the price does fall.
Split Capital Investment Trusts
Four classes of shares are available:
- Zeros or ZDPs (Zero Dividend Preference Shares)
- Income Shares
- Ordinary Income Shares
- Capital Shares
These can be briefly described:
As the name suggests, there is no entitlement to income and there is a pre-determined growth of capital over a set period. This is not guaranteed. On wind up, subject to the payment of any prior bank loans, Zeros are the first in line to be paid before any other share class. Our usage: rarely
Shareholders receive all the income which is higher than normal (as the Capital shareholders have no entitlement to income) but their entitlement on wind up is a fixed amount. If in the course of the life of the trust, an investor pays a higher price for the shares than the redemption price, and holds the shares to redemption, there will be a loss of capital. There is no entitlement to any capital payout on wind up. Our usage: occasionally (old fashioned class)
Ordinary Income Shares
This description is confusing as it closely resembles Income Shares. There was an attempt to re-describe this share type as Income & Residual Capital Shares, a much more accurate description of its true function, but for reasons best known to those who opposed it, the share class reverted to being called Ordinary Income Shares.
Shareholders are entitled to receive a higher than normal income plus whatever capital proceeds are available for distribution after repayment of any bank loan and what is due to any share class having a prior entitlement (usually Zeros). Our usage: often
Shareholders are not entitled to any income but are entitled to all the surplus assets on wind up after repayment of any bank loan and any share class having a prior entitlement. In essence, the Capital shareholders are last in the queue to be paid. This class offers the potential of the highest rewards but at the greatest risk. Some Splits have been wound up with the Capital shareholders receiving nothing on wind up. Others have been rewarded handsomely. Our usage: occasionally
The difference between bid price (price you receive for selling the share) and the offer price (price offered to buy the share). The tighter (smaller) the spread the better.
Stocks & Shares ISA
Individual Savings Account introduced in 1999 to replace the PEPs and Tessas.
The benefits of having shares in an ISA are:
A Higher Rate taxpayer saves 32.5% tax on gross dividends.
Income is not counted as income by HMRC thereby it can be used to help prevent straying into a higher rate tax bracket.
Retired investors over age 65 also benefit because ISA income does not reduce their extra tax-free Age Related Personal Allowance. Normally, if their annual income exceeds the Total Income Limit, it results in the Age Related Personal Allowance being cut by £1 for every £2 of income received until it is the same as the normal Personal Allowance. This means they pay an effective tax rate that is the average of the standard and higher tax rates on income over the Total Income Limit up to a further amount that is twice the difference between the Age Related Allowance and the Personal Allowance! However, ISA income is not counted towards this limit.
ISA income should not be counted as forming part of investor’s income for means testing for residential or nursing home care.
However, Income tax is levied on income derived from cash (interest) in the ISA at the basic rate.
Finally, on death of a spouse the ISA allowance is increased of the surviving spouse by the value of the deceased’s ISA. Effectively meaning it can be transferred into the remaining ISA without using up any ISA allowances over the years.
These resemble warrants. Subscription shares confer the option (but not the obligation) to buy shares in an investment trust at a pre-determined price at a specified date in the future and provide substantial gearing potential to the investor. Once the final exercise date has passed the subscription shares become valueless. Subscription shares can be held in an ISA. Warrants can not.
The amount of tax already deducted at source on payment of a dividend.
Top Down Analysis
Is concerned with the major economic and political news and influences and follows down through other aspects such as geographical location, demographics (age of the population) and sector attractiveness as an investment area until it uncovers a suitable company to invest in.
This comprises elements of income and capital growth. It is sound investment policy to have some of each. When markets are down and capital growth is scarce or simply unavailable, share prices fall and yields increase. In these circumstances, the income provides a cushion of comfort.
The finest bid and offer prices quoted at any one time.
This is one other main method of investing. It basically consists of buying investments for less than their perceived value in the expectation that, in time, they will grow as other investors come to realise their true value. The window of opportunity can be for quite long periods. The rewards may be less than for growth investing but this depends on the period chosen. It is generally accepted that for longer periods, value investing usually does better than growth investing. The investment trust universe is best suited for value investing as there is the opportunity to buy at discounts and sell at premiums. It encompasses a wider choice than for growth investing as companies can be undervalued for a whole host of different reasons and special situations.
The magnitude a price changes measured over a period of time.
A graph showing the relationship between the yields on fixed interest securities against the time to maturity. It is used as an indication as to the expected future movement of interest rates over time.
If you are confident your current arrangements are best suited to meet your current requirements – congratulations! However, if you are doubtful and would welcome independent advice, why not contact us in confidence to book a free no-obligation consultation?