Investing in individual shares isn’t right for everybody, but neither are index trackers or unit trusts — the latter in particular because of their tendency to deliver poor returns and high fees.
There is another way
One alternative that remains slightly outside the mainstream but has a very long and successful track record is investment trusts.
These are listed companies that invest in shares. Their sole purpose is to invest their shareholders’ money profitably. If their investments rise in value, the trust’s share price rises (usually). Like other listed companies, they can pay dividends and buyback or issue their own shares.
The main difference between investment trusts and unit trusts is that when you invest in an investment trust, you are buying shares in the company, not in its investments. This means that your goals are aligned exactly with the company’s goals — you want its share price to rise.
Although investment trusts do (naturally) have costs, these are taken out of its profits, not directly out of your investments. This means that the underlying company cannot be profitable if its investments are not profitable — the complete opposite of unit trusts, where fees are taken directly out of your money and the company operating the investments can be profitable, even when you are losing money.
A Small Cap Specialist
Anyway, after all that, I’d like to introduce the latest article I’ve written for the Motley Fool. There are not many investment trusts specialising in small companies — but this one does, and it has a very successful track record, too. Find out more in the full article.