The role of Investment Trusts in the capital market
An Association of Investment Trust Companies (AITC) case study

Page 1: Introduction

The capitalmarket enables individuals and organisations with spare capital (money which they want to invest) to channel these funds to businesses and other organisations that need investment capital (money for expansion or other purposes). This case study explains the operation of Investment Trusts, which are a key part of the market.
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Page 2: The need for funds

Businesses sometimes need funds above the income they get from trading to help them grow and also to carry out their day-to-day trading activities. Business acquire funds from several sources:shareholder capital - where investors give the company money in exchange for shares (long-term)loan capital (medium-term)bank overdrafts and trade credit (short-term).This study concentrates on longer-term...
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Page 3: Investment Trusts as sources of funds

Investment Trusts provide invaluable funds to business by acting as intermediaries. They channel funds from financial institutions and households to businesses through the Stock Market and these funds can help businesses grow and expand.Investment Trusts provide their investors with investments tailored to investors' individual requirements eg the degree of risk an investor is willing to take...
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Page 4: Setting up and managing Investment Trusts

An Investment Trust is a public limited company in its own right and is listed on the London Stock Exchange. As such, it has an independent board that protects shareholders' interests and appoints the investment management company. Investors buy shares in the company. An Investment Trust does not make or sell physical goods. Its sole purpose is to use shareholders' money to invest in the shares of...
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Page 5: Reasons for investing in an Investment Trust

Investment Trusts are attractive to investors for several reasons. Some people buy Investment Trusts to build up a pool of capital for some future event such as paying for their children's university education, while others invest in this way to provide a pension. Investors can also benefit from investing in Investment Trusts in a tax efficient manner such as in an Individual Savings Account (ISA...
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Page 6: Income and growth

Recent years have been characterised by low levels of inflation. In a low inflation world, people are increasingly attracted towards different forms of investments, whether for income, growth or both.Many investors want a high level of income and have a lump sum to invest for this purpose. Some Investment Trusts are therefore organised so as to squeeze as much income out of their investments as...
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Page 7: Understanding risk

There are many specialist Investment Trusts which invest only in one sector. For example, you can invest in a trust which buys shares only in pharmaceutical companies or hi-tech industries. Other examples include trusts which buy shares only in financial institutions or communications companies.Because these Investment Trusts focus on specific fields they are not spreading their risks. They are...
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Page 8: An investment risk pyramid

The level of risk that an Investment Trust takes is to some extent dependent on where it invests.This investmet risk pyramid indicates the level of risk generally involved in investing in different parts of the world:The pyramid shows that Investment Trusts specialising in Emerging Markets (eg South America) are exposed to far greater risks than those which, for example, invest in a portfolio...
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Page 9: Spreading risk

Let's take a look at how an Investment Trust can spread risk and secure good returns in terms of both income and growth. Some Investment Trusts spread risk by investing in countries all over the world. An Investment Trust investing globally might spread its investments in the following countries: UK 38 rest of Europe 25 USA 23 Japan 9 rest of Asia 3 elsewhere 2 When choosing a company in which...
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Page 10: Conclusion

Investment Trusts play a vital role in helping well-managed businesses to secure finance. At the same time they provide attractive opportunities to many investors - from young adults saving for their future, to parents saving for their child's education or to provide an income for those already in retirement. They also provide a service to large financial institutions that are responsible for...
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Related: Association of Investment Trust Companies (AITC)
Case studies in Business Case Studies