Blue Planet investment management

 FREQUENTLY ASKED QUESTIONS

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  Questions relating to an Investment Trust's structure
1. What is an Investment Trust?
2. How are investment trusts regulated?
3. What are the main differences between Investment Trusts and Open Ended Investment Companies (OEIC)?
4. What is the NAV per share?
5. Who calculates the Investment Trust’s NAV?
6. Why is the Investment Trust’s NAV per share different from the share price?
7. What is the Discount / Premium?
8. What is the bid-ask (bid-offer) spread?
9. What is the mid price?
10. Who sets the Investment Trust spread?
11. What is gearing?
12. What do an Investment Trust’s Registrars do?
1. What is an Investment Trust?

An Investment Trust, despite the name, is in fact not a trust but a stock exchange listed “Public Limited Company” (PLC) that invests its capital in other companies and/or trusts. Like other listed UK companies they are subject to the listing rules of the London Stock Exchange as well as the requirements of the Companies Act 2006 and to this end produce annual report and accounts, hold AGMs and are required to have an independent board of directors. An Investment Trust’s board of directors monitor the various “outside” relationships, in particular the Investment management relationship to ensure the trust’s investment policy and objectives are being followed as well as performing an oversight function with respect to the Investment Manager’s performance.

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2. How are investment trusts regulated?

Investment Trusts are quoted companies listed on the London stock exchange (www.londonstockexchange.com). Like other companies, they are subject to the Companies Act 2006 however as “Investment Trusts” they must also conduct their business in a manner as stipulated by Section 1158 of the Income and Corporation Taxes Act 2010. Companies that comply to section 1158 can obtain 'approved' status for tax purposes which basically means they do not pay capital gains tax on any profits arising on disposals of its investments and in turn their shareholders are only subject to capital gains tax on the disposal of their shares in the investment trust (i.e. double tax charges are avoided). The main intent of the Income and Corporation Taxes Act 2010 is to restrict a single holding, at time of investment, to 15% of gross assets and ensure that the investment trust does not retain more than 15% of its income from securities which income in turn should be not less than 70% of total income.

Investment Trusts are subject to the listing rules of the UK Listing Authority as laid out in the Financial Services and Markets Act and in addition the Financial Services Authority (www.fsa.gov.uk) regulates the conduct of investment managers.

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3. What are the main differences between Investment Trusts and Open Ended Investment Companies (OEIC)?

While Investment Trusts and OEICs are both collective investment schemes there are a number of important distinctions. Investment Trusts are “closed ended” which means they have a fixed number of shares in issue, which can only be changed with shareholder consent, while OEICs are “open ended” and as such the number of units or shares in issue vary according to demand. As a consequence of this structure, the price of an Investment Trust is determined by supply and demand and is thus often priced at a premium/discount to net asset value (NAV) while OEIC prices are based on NAV and are bought / sold from the OEIC’s Authorised Corporate Director (ACD). Furthermore, an Investment Trust, which is a quoted public company, will often exhibit a bid-ask spread while an OEIC, which operates under a special company structure, is quoted at a single price (i.e. the NAV) although the ACD may demand a “dilution levy.”

Furthermore, Investment Trusts are able to borrow extensively, gearing their portfolios to increase exposure to investment markets, while OEICs are only allowed to borrow up to 10% of the fund.

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4. What is the NAV per share?

The Net Asset Value (NAV) per share is the net assets of the trust divided by the number of shares in issue. An Investment Trust’s (basic or undiluted) NAV is determined by subtracting its liabilities from the market value of its investments, cash and other current assets and dividing that figure by the number of outstanding shares. Where the trust has warrants in issue then a “diluted” NAV (i.e. assuming all warrants are exercised) is also calculated.

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5. Who calculates the Investment Trust’s NAV?

Blue Planet Investment Management Ltd calculates the Investment Trust’s NAV on a monthly basis and these are posted on the AITC (www.theaic.co.uk) and London Stock Exchange (www.londonstockexchange.com) websites. Audited NAV’s can be found in the annual report.

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6. Why is the Investment Trust’s NAV per share different from the share price?

The NAV is impacted by the changing value of the underlying investments while the Investment Trust’s share price is determined by the relationship between the supply/demand for the investment trust’s shares in the market. In most circumstances stockmarket gyrations result in an Investment Trust share price that is different from its NAV per share. In the event that the share price is lower / higher than the NAV it is said to be trading at a “discount” / “premium.”

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7. What is the Discount / Premium?

In most circumstances stockmarket movements result in an Investment Trust share price that is different from its NAV per share. In the event that the share price is lower / higher than the NAV it is said to be trading at a “discount” / “premium.” This discount or premium is calculated with reference to the Investment Trust’s mid price. The discount / premium at which the shares of Investment Trusts trade, relative to their NAV, fluctuate over time.

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8. What is the bid-ask (bid-offer) spread?

The spread is the difference between the bid and ask price or, put another way, the difference between the highest price an investor will pay for a security and the lowest price someone will accept to sell a security.

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9. What is the mid price?

This is the average of the bid price and ask price.

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10. Who sets the Investment Trust spread?

This is set by the market-makers, who are dealers that continually buy and sell securities. The size of the spread is a function of the securities “liquidity.” A stock’s liquidity represents the ease in which it can be bought or sold.

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11. What is gearing?

Investment Trusts are companies that are able to borrow money (i.e. gear) and invest the proceeds. The aim of “financial gearing” is to increase returns to investors in a rising market (and vice versa in a falling market). In general Investment Trusts tend to borrow when interest rates are low (i.e. low financing costs) or at times when there is a suitably compelling investment case. However, over the long term, shares have generally outperformed the cost of debt.

The gearing ratio is the ratio of a company’s borrowings to its net assets. In other words a company with £100m equity and £30m in debt is 30% geared.

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12. What do an Investment Trust’s Registrars do?

Under the Companies Act 2006 all public companies must maintain a register of their shareholders and warrant holders to determine ownership of a security. This information is also used to determine who is eligible for dividend and capital distributions and who can vote at company meetings.

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