Expert view: Maintaining the value of your capital

In last week's article, I discussed the benefits of investing in closed-ended investment companies on a low-cost basis. But for smaller charities, maintaining regular and reliable sources of income is equally as important as maximising returns and maintaining the real value of investments.

In the investment trust sector, a large number of companies have stellar records of consistently growing dividends over decades. Many of these companies also have sufficient reserves to continue to pay increasing dividends during market downturns.

However, for an investment company with a fixed number of shares issued, excess demand for the shares will be reflected in a premium price. Conversely, a decline in demand for the shares is reflected in a discounted price. If and when the discount turns into a premium, you benefit from a double whammy - the increase in share price along with the possibility of getting more for those shares than the underlying value of the company's assets at the time of purchase.

Another issue is liquidity. With open-ended funds, you can buy and sell in whatever size you like, whenever you like. This is often not possible with closed-ended funds. However, this is more of an issue for charities investing tens of millions of pounds than for a small charity managing funds of less than £3m or £4m.

For any finance directors or trustees who feel overwhelmed with the choice, there are three main options. The most flexible would be to appoint a specialist broker who researches and follows investment trusts. This broker could construct and manage a portfolio of investment trusts on your behalf in accordance with your stated risk profile, investment objectives and income requirements.

A second approach is to go to one of the specialist fund of funds managers, who will have their own in-house portfolio of investment companies that can be adjusted according to their own investment guidelines.

The final option would be to invest in a general investment trust that has a wide range of different asset classes encompassing both UK and global equities.

Smaller charities do not have to exclude themselves from long-term investment returns that protect the real value of their capital. They can hardly afford not to explore these opportunities at a time when global inflation is rising and the need to preserve the value of investments for future stakeholders is even more pressing.

- For Biman Mittra's 10 October article, go to

- Biman Mittra is director of finance at Coram. This is the second of two articles on investment companies.

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