SAVINGS & INVESTMENTS

Investment Trusts

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

Investment Trusts

Investment trusts are a form of collective investment, but they are quite different from open-ended funds like unit trusts and OEICs. An investment trust is a publicly listed company, with its shares traded on a stock exchange, such as the London Stock Exchange (LSE).

The main difference is their ‘closed-ended’ structure. Unlike an OEIC, which issues new shares to attract new investors, an investment trust raises a fixed amount of capital at launch. Afterwards, investors buy and sell existing shares among themselves on the open market.

This structure indicates that the share price is set by supply and demand, as well as the value of the trust’s underlying assets (its Net Asset Value or NAV).

As a result, an investment trust’s shares can trade at:

Gearing can boost returns

An independent board of directors supervises the trust and appoints a fund manager to manage the portfolio. One powerful tool available to the board is the ability to borrow money to invest, a practice known as ‘gearing’. While gearing can boost returns in a rising market, it also amplifies losses when markets fall, increasing the trust’s volatility compared to an equivalent fund without gearing.

Returns for investors can stem from capital appreciation in the share price and dividends paid by the trust. Investment trusts may retain some of the income they receive in a ‘revenue reserve’, which can be utilised to level out dividend payments during leaner years, although these are never guaranteed.

Closed-ended structure

Investment trusts are frequently used to invest in less liquid assets, such as private equity, infrastructure, or smaller companies, since the closed-ended structure means the manager does not need to sell assets to meet investor redemptions. This can introduce additional risks related to the valuation and salability of these holdings.

Costs include ongoing charges, transaction costs, and occasionally performance fees. As the shares are traded on a stock exchange, buying and selling will also incur brokerage fees and a bid-ask spread. For tax efficiency, investment trusts can be held within wrappers like ISAs or pensions.

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.