Ask Money: investment trusts vs reits
The Association of Investment Companies helps a reader with a query.
22nd June 2020 10:45
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The Association of Investment Companies helps a reader with a query.
The difference between investing in a fund and an investment trust are often well explained in the financial literature. But what is the difference between investing in a company and an investment trust that both invest in similar opportunities? Are there any additional risks associated with investing in non-investment trusts due to their company structure?
Picton Property Income, for example, is a company that invests in a range of commercial properties across the UK, while BMO Commercial Property Trust similarly invests in a range of UK commercial properties but is a real estate investment trust (Reit). Investment trusts provide an opportunity to diversify, as they invest in a range of companies. Some non-trusts, however, spread their risk in a similar manner to trusts. Is there something in the structure of the latter that makes them less risky than other similar companies? Another way of framing the question is: what makes a company an investment trust?Neil Waby, by email
The Association of Investment Companies replies: To use Neil’s example, both Picton Property Income and BMO Commercial Property are Reits. The difference is that Picton is a property trading company and BMO Commercial Property is a fund.
Property trading companies might buy and develop land and are likely to have large workforces. Land Securities and SEGRO would be examples of trading company Reits that are quite well-known. On the other hand, Reits that are funds may have no employees at all, only non-executive directors.
Like conventional investment trusts, they typically outsource the day-to-day running of their property portfolio to a management company.
Both of these types of Reit have the same tax and legal structure. The difference is that they belong to two different chapters of the FCA’s listing rules – Chapter 6 for Reit trading companies and Chapter 15 for Reits that are funds.
What this really means is that the FCA has slightly different requirements of each type of Reit. For example, Chapter 15 requires that the Reit needs to have a published investment policy that it adheres to. Chapter 15 also requires oversight of the manager and for the board of directors to be independent from the manager. So these elements would apply to BMO Commercial Property.
On the difference between investment trusts and investment companies, there are many more similarities than differences. Investment companies are closed-ended, listed investment funds that allow investors access to a diversified portfolio that is professionally managed. An investment trust is an investment company that is based in the UK. Non-UK investment companies are based outside the UK, predominantly in the Channel Islands, but still listed on the London Stock Exchange.
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This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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