Investment Trusts Q&As


(Alex Sherwood) #1

We’ve just published a blog post explaining what investment trusts are & how they work.

They’re a ‘well kept secret’ at the moment though so we’re guessing that some of you will have more questions about trusts right now. If you do, please post them here & our community will help you get to grips with investing in them.


(Alex Sherwood) split this topic #2

A post was merged into an existing topic: What’s an investment trust?


(Stu) #3

OK, I’ll start the ball rolling. Should already know this as have had some City of London shares for a while.

In the blog post it states that Inv Trusts charge a management fee. How is this fee taken - is it taken from your holding, or will it be taken from any credit balance in freetrade?


(Harry) #4

I believe it is factored into the share price, i.e it will be taken from within your fund, not on the Freetrade platform.


(Stu) #5

Good to know - thanks Harry


(Matteo) #6

I was wondering what is the difference between a trust and a company like Berkshire Hathaway.
Because the structure somehow feels very similar since are both close ended and have freedom on where to invest.
What are the advantages and disadvantages of both structure?


#8

Great insight.

Berkshire does have a huge number of holdings and could be used to invest in a lot of different stocks in a single investment. But it’s not the same as a trust.

Here’s why.

First up, investment trusts are a UK-specific variant of closed end fund. The US regulator instead just allows vehicles called closed end funds, which are basically similar but regulated differently to trusts in a different environment.

So how is Berkshire Hathaway different from US closed end funds?

US closed end funds are regulated in a specific way by the 1940 Investment Companies Act that requires them to treat dividend income in a particular way, defines how they can market themselves and use capital.

In particular, funds just pay their dividends out, without retaining that cash in the company. If you wanted to reinvest you could, but you’d really just be buying more stock of the trust.

This has implications for the tax they pay and the impact of that on investors.

Berkshire Hathaway is more like a massive conglomerate. This means it has more autonomy than a closed end fund. It pays corporation tax as a company would. It can choose to retain all the cash it generates - in fact BH has never paid a dividend (I think).

It fully owns and operates several subsidiaries, including many insurance firms which run under the Berkshire brand. You don’t pay a management fee as you would with a fund.

I don’t know of any closed end funds that outright own companies as subsidiaries - although they technically could.

So Berkshire, although you might use it for similar strategies to trusts, isn’t a trust or a fund.


(Matteo) #9

Thanks @Toby for the great reply!
So if I can roughly sum up the difference between an holding company like BH and a close ended fund/UK trust is the tax regime, the management fee that are present only in the trust/fund and the management of dividends that funds and trust (at least REIT) are forced to pay out. Did I get it right?
About the fees are they taken from the dividends or from the principal itself?
Thanks again!!!


#10

Yep and the general corporate structure, full ownership of subsidiaries, full corporate chain of command etc! :pray:

Re fees, I think (but am not certain) that trusts are free to deduct fees from either dividend cash flow or stock sales. But there are some trusts which have minimal or non-existent dividend pay-outs, so these will obviously have to sell stock.


(R3) #11

Thanks for the excellent and very informative answer.

Berkshire Hathaway has paid only one dividend - a tremendous $0.10 per share -under Warren Buffet, in 1967, and he later joked he must have been in the bathroom when the decision was made.