They will have a fixed share capital in issue at any given time, as for any company
with a traditional capital structure. This means that the number of shares in issue can
only be increased/decreased by application to the relevant companies registry/the
courts, and it can be a fairly time-consuming and (if stamp duties or similar taxes are
involved) a costly process. It would certainly not be undertaken on a regular basis to
accommodate the ebb and flow of investor demand.
Because of this, investors in closed-ended funds do not have the option of dealing
direct with the fund in its shares in the way that we saw for open-ended funds. The
exception is of course when the shares are initially issued, or when some fairly major
capital restructuring is being undertaken. Instead, investors wishing to buy shares
must find an existing holder willing to sell, and vice versa. Thus, investment trusts are
usually listed on a stock exchange, which provides a secondary market in the shares
and an exit route for investors wishing to realize their holding.
Because of this, shares in an investment trust are not dealt in at a price related
directly to their NAV, but instead by reference to market forces and investor supply
and demand. Of course, it is perfectly possible to calculate an NAV – indeed it will be
necessary to do on a regular basis for reporting and investment management pur-
poses, and changes in the fund’s NAV will affect investors’ perception of its appeal
and therefore their demand for the shares. However, the fact that dealing prices are
arrived at through the action of market forces means that they can often be signifi-
cantly over or (more commonly) under the actual NAV per share. This is termed ‘trad-
ing at a premium’, or ‘at a discount’, as the case may be. Where an investment trust is
established with a limited life, that discount or premium will narrow as the winding-
up date of the trust approaches, since the terms of the company will be such that its
assets are to be distributed in accordance with a predetermined formula (after pay-
ment of any costs, prior charges and so forth).
As well as the ordinary share capital, which makes up the majority of their funding,
investment trusts can issue different classes of shares, and indeed loan stock and war-
rants – just as any ordinary company can. This can allow a range of investments to be
issued which have appeal to different types of investor.
We will look at the mechanics of fund pricing, and the adjustments which may have to
be made to ensure fairness to incoming, outgoing and remaining investors, in Chapter 5.
2.2 Legal structures: corporate, trust-based, partnership and
Funds can be established using a variety of legal structures – depending on the statu-
tory provisions in the jurisdiction in which the fund is to be constituted. The alterna-
tives open to a particular sponsor will depend on:
The capital structure required – that is, open-ended or closed-ended. Some legal
forms cannot be established as open-ended vehicles in certain jurisdictions.
The intended nature of the underlying investment assets – funds investing in less liq-
uid assets may be better structured as closed-ended vehicles, so that the manager
does not have the distraction of needing to raise cash to meet investor redemptions.
This may influence the choice of legal form, as noted above.
Different fund structures 43