Education and resources
What is an Investment Company?
As its name suggests, an investment company is simply a company that makes its profits by investing. It may invest in the shares of other companies plus a range of other assets such as property and bonds.
By buying shares in an investment company, you're entitled to share in any rise in its share price or any dividends it chooses to pay out. In this way, investment companies can give investors of any size a ready-made and professionally managed portfolio of investments.
How they are structured
Listed investment companies are public limited companies or PLCs. Their shares are traded on a stock market such as the London Stock Exchange. They are required to publish regular information about their activities and their financial position. And because they are listed on a stock exchange, you can check their latest share price at any time.
Like any public limited company, an investment company must have an independent board of directors appointed by its shareholders to oversee its activities and decide its future direction.
How they invest
Every investment company has a stated investment objective. This can range from generating long-term capital growth by investing in emerging markets to delivering a regular income by investing in UK shares, or equities.
The board of the investment company employs a professional investment management team to make day-to-day investment decisions. The investment management team will put together a portfolio which could comprise anything from 50 to 500 or more different holdings. The investment team has to report regularly to the board and shareholders on their progress.
What makes investment companies different
The public company structure makes investment companies a bit different from other types of investment fund such as unit trusts or OEICs. Here are some important differences to know about:
They can take a really long-term view
Unit trusts and OEICs are open-ended funds that create or cancel units/shares as investors look to buy into or sell out of the fund. Investment companies, on the other hand, are closed-ended: they issue a fixed number of shares that investors can buy or sell on the stock market.
Because they don't have investor money flowing in and out unpredictably, investment companies have a lot of control. They can take a very long-term view of their investment portfolio and don't have to hold lots of cash to pay investors back their money. This is why they are often considered a good vehicle for less 'liquid' investments that can take time to sell, including property, emerging markets and shares in small and private companies
They have an independent board
Like all public companies, investment companies are required to have a board of directors to ensure they are being run in the best interests of their shareholders. The board even has the power to replace the investment management team if performance isn't considered up to scratch.
They may borrow money to boost returns
Just as other companies can get loans to expand their business, so investment companies can borrow money to invest alongside the capital provided by shareholders. This 'gearing' can potentially increase returns when investments are rising in value. But it can magnify losses when markets fall – so needs to be managed carefully.
They have income flexibility
Other investment funds have to pay out all the income generated by their investment portfolio each year. Investment trusts can hold back up to 15% of their income to pay out in future years. This can allow them to smooth out their income payments from year to year. In fact, there are over 20 investment trusts that have increased their annual income dividend to shareholders for 20 years or more in a row (source: The Association of Investment Companies, March 2019).
Their share price is driven by investor demand
Because an investment company has a fixed rather than variable number of shares in issue, its share price is driven by investor demand. The performance of the underlying investment portfolio will have a big influence. But unlike a unit trust or OEIC, the share price won't track its underlying portfolio precisely. Instead shares can be at a discount (lower than) or at a premium to (higher than) their net asset value depending on the level of investor demand for shares.
The benefits of being a shareholder
By investing in an investment company, you become a shareholder in the company. This means you have the right to:
- Receive any dividends being paid out: investment companies will look to pay out at least some of their investment profits and income as an annual dividend to shareholders. The dividend can vary and there's no guarantee that one will be paid – but many companies aim to maintain or grow their dividend each year.
- Attend and vote at annual general meetings*: you can vote on issues such as the appointment of directors, the company's investment objective and board remuneration and tabled motions to be discussed. If you can't attend the AGM, you can vote by proxy (if your chosen investment service allows this).
- Receive the annual report*: the annual report provides a wealth of information about an investment company, its investment strategy, holdings and financial position over the past year. Companies also provide a shorter interim report every six months.
- Oversight from an independent board: part from a few self-managed companies, most investment companies have a board of directors, independent of the investment manager, to ensure the company is being in run in your best interests.
*If you are investing through an online investment platform, check if these shareholder rights will be passed on to you. Many investment companies now publish their annual report online.
An investment company is formed to allow its owners / shareholders to pool their funds in order to help them access a broader portfolio of investments than they might otherwise be able to do if they were to invest on their own. Investment companies are public companies, listed on a stock exchange, where investors can buy and sell shares in them in exactly the same way that they do when investing in any other public listed company. They are well established, having been around for over 150 years. An investment company will aim to generate returns for its shareholders both in terms of capital growth and dividend growth, but the relative importance of each will vary from company to company. Typically, the board of directors of the investment company will appoint an investment manager to select and manage the portfolio of investments owned by the company. Unlike most large public companies listed on a stock exchange, where pension funds and investment funds own the majority of the shares, investment company are frequently largely held by private investors.
Unlike unit trusts and most Open-Ended Investment Companies (OEICs), an investment company has an independent board of directors which makes decisions about its investment manager and monitors its performance. They answer to the shareholders and stand for re-election on a regular basis.
The benefits of an investment company:
- Investment company permit private investors access to diversified portfolios of investments which can helps to spread their investment risk.
- The Ordinary shares of an investment company typically convey voting rights.
- Investment companies are traded on a stock exchange. The share price reflects the collective views of the market and the demand for and supply of the shares. This can lead to the shares trading below (“at a discount”) or above (“at a premium”) to the to the value of the underlying assets. If you buy at a discount, you might hope that in addition to any increase in the value of the portfolio, the discount might reduce, enhancing your return. If the discount widens / the premium reduces, then the return you receive will be lower than the return on the portfolio’s assets .
- The existence of a premium / discount, particularly when compared to other similar investment companies, provides investors with an indication as to how the market collectively views the prospects of the company and the market or assets into which it invests.
- Investment companies invest in a wide range of different asset classes including equities and bonds, but also they are particularly suited to investing in illiquid, long-term investments, such as property, infrastructure or private equity.
- They provide the investment manager with a permanent pool of capital, which allows more of the investment capital to be invested as cash does not have to be held to fund redemptions.
- Investing alongside other investors allows you to benefit from economies of scale, and be able to employ a professional fund manager to manage the portfolio on your behalf.
- Investment companies can borrow to increase the size of the investment portfolio, much like a mortgage. This is referred to as gearing. The theory is that over the life of the borrowing, the return from the portfolio will more than cover the cost of the borrowing (the interest on the loan). The surplus return will accrue to the investors. Negative returns however may be increased due to the existence of gearing.
- Investment compnaies do not have to distribute all the income that they receive in a year and can retain up to 15% of their income each year and place this into a reserve. Any such surplus income held can be used for smoothing purposes and allow the company to boost the dividends that they pay in years when the income generated has fallen. This provides greater certainty to shareholders that the income they receive can increase or be maintained year on year. A few investment companies have a track record of having increased their dividends in each of the last 50 years.
- Investment companies will not create more shares without the express approval of their boards – and shareholders, thereby ensuring that your holding is not diluted.
To find out more about Investment Trusts (also called investment companies), please visit the Association of Investment Companies website where you will also find news and industry research.
Individual savings accounts (ISAs)
ISAs were introduced in April 1999. An ISA is a 'wrapper' which, under current legislation, allows your savings to grow free from income or capital gains tax (whatever your rate).
There are two different types of ISAs, Stocks & Share and Cash. You can only have one Stocks and Shares manager for each tax year, Aberdeen Investment Companies do not offer a cash ISA.
Find out how to invest in an ISA.
Saving for children
Everyone wants the best for their children. So why not get real investment expertise working on their behalf?
Proceeds from a children's saving plan can be used for any purpose you wish – from helping to pay for childcare to funding school fees, university costs or a deposit on a first home.
If you gift money to your child, there may be income or inheritance tax implications which you will need to consider. Although children have their own personal income tax allowances which are the same as those of adults, if the income generated is from money that was given or invested by parents, then tax will still be due upon it. See our FAQs section for more information on the tax implications of investing for children.
Whatever your ultimate savings goal, there are many great, different products on offer, and quite a lot of things to consider when saving on behalf of a child. Our FAQs on investing for children provides some useful questions and answers.
You can invest in our range of trusts through Aberdeen Standard Investment Plan for Children.
If tax efficiency isn’t an issue – or if you’ve already invested your ISA allowance – then a Share Plan is the way for you to invest. Quite simply it buys and sells shares on your behalf using a secure nominee account. You can invest as much as you wish either in one-off lump sums or by making monthly contributions by direct debit.
Find out how to invest in the Aberdeen Standard Share Plan.
Although we can't offer financial advice, our Investor Helpline is here to answer any questions. If you need personalised guidance, we strongly advise that you speak to a qualified financial adviser.
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