SAVINGS & INVESTMENTS

Investment Trusts

A publicly listed company whose shares are traded on a stock exchange.

Investment Trusts

An investment trust is a type of pooled investment vehicle, but it operates very differently from open-ended funds such as unit trusts and OEICs. Rather than expanding and contracting as investors come and go, an investment trust is set up as a public limited company whose shares are listed and traded on a stock exchange, most commonly the London Stock Exchange.

When an investment trust is launched, it raises a fixed amount of capital. After that point, no new shares are routinely created or cancelled. Instead, investors buy and sell shares between themselves on the stock market. This is why investment trusts are described as closed-ended.

Share price, NAV, and discounts

Because shares are traded on an exchange, their price is influenced by market demand as well as the value of the trust’s underlying portfolio. The value of the portfolio itself is referred to as the Net Asset Value (NAV).

This structure means the share price may not match the NAV exactly.

Shares can trade:

Discounts and premiums can widen or narrow over time depending on investor sentiment, performance expectations, and market conditions.

Governance and the use of gearing

Each investment trust is overseen by an independent board of directors. The board appoints a professional fund manager and monitors performance, risk, and strategy on behalf of shareholders.

One feature that distinguishes investment trusts from many other funds is the ability to borrow money for investment purposes. This is known as gearing. Borrowing can enhance returns when markets are rising, as more capital is invested. However, it also increases losses during downturns, making geared trusts more volatile than similar ungeared investments.

Income and long-term investing

Returns from an investment trust can come from two sources: growth in the share price and income distributions. Many trusts aim to provide a regular dividend and have the flexibility to retain some income in profitable years within a revenue reserve. This reserve can help support dividends during periods of weaker income, although dividend payments are never guaranteed.

Because investors do not redeem directly from the trust, the manager is not forced to sell assets to meet withdrawals. This makes investment trusts particularly suitable for holding less liquid assets, such as private equity, infrastructure projects, or smaller companies. While this flexibility can be advantageous, it also introduces additional risks around asset valuation and liquidity.

Charges and tax considerations

Costs typically include ongoing management charges, portfolio transaction costs, and in some cases performance fees. As shares are traded on an exchange, investors will also incur brokerage charges and a bid-offer spread when buying or selling.

For tax efficiency, investment trusts can be held within wrappers such as ISAs or pensions, allowing income and capital growth to be sheltered from UK tax.

THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.

TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.