What is an Investment Trust?

An investment trust is a company with a fixed number of shares in a stock

exchange that it sells to investors and then pools the money to make
investments on their behalf. The unique features of investment trusts make
them a secret weapon for many investors.

Investment trusts, also known as a closed-ended fund, are often called ‘the
city’s best-kept secret’. Still, they are often overshadowed by the open-
ended investment companies (OEICs) and unit trusts they routinely
outperform.

What is an investment trust?

Investment trusts are companies listed on the stock exchange that sell
shares to investors and then pool that money together to make carefully
selected investments in bonds, property, shares and other assets on behalf
of its shareholders.

How investment trusts work

Investment trusts are led by an independent board of directors who are

elected to represent shareholder interests. It is their job to set policies and
hire a fund manager from an asset management firm who will be
responsible for picking the best investments and ensuring that shareholders
get value for money.

Like other collective investments, each trust has a specific mandate or

objective. The Association of Investment Companies (AIC), the industry’s
trade body, categorises trusts by sector, usually based on which region,
industry or type of investment they pursue.

Some have a broad remit, targeting all companies in the world with the
greatest potential to grow in value. Others are more niche, with a more
focused remit, such as domestic dividend payers, small companies,
healthcare, property or ethical and sustainable initiatives.

The type of investment a trust chooses, and how it is pursued, is important

in determining how risky the investment might be.
How do investment trusts differ from funds?

Investment trusts have been around since the Victorian era and are highly
regarded by finance professionals. A stellar long-term track record and
glowing endorsements from industry insiders, however, still haven’t
catapulted them into the mainstream.

Part of the reason they are overlooked is down to choice – there are fewer
than 400 investment trusts compared to the thousands of funds, such
as unit trusts and OEICs. Trusts also have a reputation for being complex
and difficult to understand.

Four features that make investment trusts stand out:

1. Fixed supply of shares

There are a set number of shares in circulation, meaning you may only
invest when the trust is launched or if someone wants to sell. This close-
ended policy gives trust managers freedom to pursue their objectives,
without being pressured to add investments when new money flows in and
offload them when investors decide to exit.

2. Freedom to borrow

Some trusts borrow money to buy bigger stakes in investments, known as

gearing. This process can be both lucrative and dangerous because it
amplifies gains when an investment performs well but accentuates losses
when they fall.

3. Ability to trade at a discount and at a premium

Since investment trusts trade on a stock exchange, the share price depends
on supply and demand, rather than the actual value of their combined
holdings – known as net asset value (NAV).

Since the price is based on what investors think it is worth, instead of the
NAV, the investment price can be undervalued or overvalued. Without
demand, an investment trust is undervalued and will sell for less than its
NAV, which is called trading at a discount. When a trust is in high demand,
the trust is overvalued and its trade price can rise beyond its NAV, which is
known as trading at a premium.
4. Regular cash flow for investors

Investment trusts can withhold up to 15% of income generated from their

investments to deliver back to investors in the form of a dividend payout at
a later date, such as when returns are down. This unconventional approach
differs from open-ended funds that return all income to investors. It also
means that investors should always get a stable or steadily increasing
income, regardless of what is going on in the economy and in company
boardrooms. This is a popular feature for investors who like dividend
payouts.

How to invest in investment trusts

You can buy shares in an investment trust by purchasing them directly from
the trust or by buying them on the secondary market from a broker or
investment platform.

To purchase them directly from the trust, you will need to buy them from
an investment trust that has recently launched.

To buy them on the secondary market, you will need to find willing sellers,
which can be relatively easy. All you need is a broker, or an investment
platform to act as your broker. These online fund supermarkets offer
competitive pricing, lots of choice, and the option to invest tax-free by
purchasing shares through an ISA.

Usually, you will have to pay platforms for any transactions you make, as
well a fee to hold your investments with them – the AIC has put together a
useful table to compare these charges.

How to choose an investment trust

Start by researching which investment trust best suits your needs. Establish
your goals, consider what sector you want to invest in, and browse through
the choices on the AIC website.

Once you have narrowed down your criteria, it is time to put together a
shortlist. Important factors to think about include track records, if the trust
is trading at a fair price, whether you want to make use of gearing, and any
associated charges.
Aside from platform fees and other external costs, you will pay the trust an
annual ongoing charge. This is deducted from your investment, expressed
as a percentage, and covers its day-to-day running expenses.

The key for investors is to figure out if the fees are justifiable, given the job
the trust has been tasked with, and whether prospective returns, after
factoring in charges, will be high enough to leave you with more money
than you could reasonably make elsewhere.

What is an Investment Trust

Fund?
An investment trust is a publicly listed financial institution, which is
a closed-end fund (CEF) that invests in shares or financial assets on
behalf of its investors or other organizations. The value of the
amount of money invested in an investment trust is dependent on
the demand and supply for the invested share or financial asset and
the underlying value of the assets that are owned.
For an investor who is looking at profits with minimal risk, It is the
best option since it allows investing in a plethora of shares rather
than putting all of the investment into one company’s share.
Although the risk of losing out on investment due to the
performance of one share would not hurt the investor, he/she will
be in a better position, having invested in other shares in the fund,
which might have a better performance.

Factors Impacting Investment

Trust Fund
Investment trust functions on the basis of the market. If the market
performs well, so will the investment trust’s fund. The investment
 trust fund manager needs to be able to gauge market conditions
and enter or exit a position that is favorable or unfavorable. As a
result, It has an inherent risk of losing out on the investment if the
right decisions are not made at the right time. Below are the two
main factors that decide the value of the investment trust.

 #1 – Supply and Demand for Shares and Assets – Since they hold
a fixed amount of shares and assets, the supply and demand of the
shares and assets held in the investment trust affect the value of
the underlying assets.
 #2 – Performance – The performance of the assets and shares in
the investment trust majorly impacts the value of the money
invested. Since the money is invested in a variety of assets and
shares, the value of the investment trust will not plummet or soar in
a short span.

Example of Investment Trust

Let’s discuss an example.

Let’s assume that you invest $1,000 in XYZ investment trust today.
The money that is received by the investment trust is pooled along
with the investment of other investors to purchase a diverse range
of products, including shares, bonds, and other financial assets.
To simplify,

 You invest $1,000 in an investment trust.

 XYZ investment trust pools the $1,000 you invested with money
invested by other shareholders into a single pot, which is the
”Fund”.
 This ”Fund” is ultimately used to buy shares and other financial
assets by the ”Fund Manager”.
 Since the money is invested in the open market, the shares and
financial assets are bought and sold depending upon the market
 conditions to seize the right opportunity to earn maximum profits
out of the invested shares and assets. This job is done by the fund
manager.
 The shares that you own can be sold in the open market at the
market price, and in this way, you can generate your own profit out
of your investment. The investment of $1,000 can increase or
decrease depending on the shares and financial assets that the fund
manager has invested in.

Advantages
Some of the advantages are as follows:

 They allow investing in a plethora of shares and other financial

assets.
 Good for investors who are looking for low-risk long term
investment options.
 They pay dividends, and the investor can earn at regular intervals
from his / her investment.

Disadvantages
Some of the disadvantages are as follows:

 To gain a considerable amount of returns from the investment, it

requires a substantial amount of time for which the money invested
needs to be locked out, which can be a minimum of five years or
more.
 They are totally dependent on the market and can result in a loss of
investment.
 Highly dependent on the decisions of the fund manager; hence the
investor can have no control other than exiting from the investment
completely.
 The profit and dividend gained from investment trust are taxable
and hence can reduce the actual returns that are gained from the
investment.

Important Points
 Investing in an investment trust fund allows the investor to gain
ownership of the share or the financial asset that the money
invested in.
 In theory, the returns from investing in an investment trust can be
humungous whereas, in reality, the returns are reliant on the
performance of the share and assets in the investment trust and the
market demand and supply of the shares and assets in the market.
 Most they pay dividends for the shares usually once or twice a year,
whereas investment trusts with an astounding performance can pay
dividends on a monthly basis.
 The dividends and the profits earned from an investment trust are
taxable.
 Gearing is a term that refers to borrowing money to invest more.
Their fund managers can borrow money to invest more into the
fund so that the returns are much higher and to get better leverage
to pay for the borrowed amount.

Conclusion
 They are closed-end trust since it holds only a fixed amount of
shares which can be bought by new investors from the existing
shareholders in the trust.
 It differs from a unit trust, where the investor is assigned a unit of
the share and is not the shareholder of the unit trust. The unit refers
to the investor’s investment in the investment portfolio.
 In the same way, it is different from a mutual fund that issues units
for the shares in which the amount is invested and not the owner of
the share.
 Supply and demand for the investment trust can be a risk to the
investment since a falling market will only make it difficult for the
investor to sell his investment at a higher price, thereby resulting in
a loss.
 Investing in an investment trust involves low risk, and the investor
can expect to earn from the investment at regular intervals in the
form of dividends.

Investment trusts
explained
Learn all about the pricing, performance and the
effect of gearing on investment trusts

What is an investment trust?

Investment trusts, such as unit trusts and open-ended investment
companies (Oeics), allow you to pool your money with that of other
investors to get exposure to a range of assets through a single investment. 
Investment trusts have been around since the 1860s and they have long
been regarded by their fans as the best kept secret of the investment world
because they have traditionally had lower ongoing charges than unit trusts
and therefore the potential for higher returns. 
This advantage has largely disappeared since January 2013, owing to
changes in the way funds could charge fees.
Here we explain how they work, and whether they're right for you.

Open-ended vs closed-ended trusts

Investment trusts are set up as companies and traded on the London Stock
Exchange.
As with any company quoted on the stock market, investment trusts have
to publish an annual report and audited accounts. They also have a board
of directors to which the manager of the trust is accountable. When you
invest in an investment trust, you become a shareholder in that company.
There are important structural differences between unit trusts and
investment trusts.

Investment trusts
These are 'closed-ended' investments, meaning they issue fixed number of shares
when they're set up, which investors can buy and sell on the stock market. This
means investment trust managers always have a fixed amount of money at their
disposal, and won't have to buy and sell to meet consumer demand for shares. This
can add a degree of stability to investment trust management that a unit trust
manager won't have.

Unit trusts
These are 'open-ended' investments and can issue or redeem units at any time to
satisfy investors who want to buy into the fund or sell their stake - this may cause
problems, as the manager may have to sell assets at a low point to pay investors
who want to sell units.

Investment trust prices

The value of the assets held by an investment trust is called the net asset
value (NAV), usually expressed as pence per share. If a trust has £1m
worth of assets and one million shares, the NAV is 100p.
With unit trusts, the price of the units you hold directly reflects the value of
the assets held by the trust.
With investment trusts the price of shares is determined by supply and
demand in the stock market. This means the price you pay will almost
invariably differ from the NAV. 
If a trust is trading at:

 Less than its NAV: it's said to be trading at a discount.

 Higher than the NAV: it's trading at a premium.

Often, investment trusts trade at a discount. This looks like good value, as
you pay less than £100 for £100 worth of assets. However, there is no
guarantee that any discount will have narrowed by the time you come to
sell. If the discount widens then you'll lose out in relative terms, whatever
happens to the NAV of the trust.
Less often, trusts will trade at a premium to NAV. This means you're paying
more than £100 to own £100 worth of assets. You might be prepared to do
this, for example, because of the skill of the fund manager. However, you
need to ask yourself whether this type of out-performance is likely to last.

 Find out more: how to invest money - our portfolios 

Where do trusts invest?

Like unit trusts, investment trusts are grouped by the geographical area
and type of investment with which they are involved.
The Association of Investment Companies (AIC), the trade body that
represents investment trusts, lists more than 30 different sectors, including:

 UK Growth
 Global Growth 
 Europe, Asia Pacific Infrastructure
 Property
 Private Equity

The level of discount or premium tends to vary by sector and changes with
market sentiment.
Where and in what a trust invests will partly determine how risky it is.

Ethical investment trusts

Most big investment companies factor in socially responsible or 'ethical'
investing in their investment strategies, and many should have dedicated
'ethical funds' that investors can choose from. 
This means they would only invest in companies that meet a certain set of
criteria, steering clear from those whose products or business practices
don't meet the required standards. 
Some ethical funds might exclude producers of meat products, for
example, or avoid companies that emit greenhouse gasses.
Investment trust performance
Investment trust shareholders often invest because they believe trusts will
outperform similar 'open-ended' funds such as unit trusts and Oeics. 
Studies have repeatedly shown that investment trusts tend to outperform
comparable open-ended funds. Research published in 2019 by the
stockbroker AJ Bell found that over the long term – 10 years or more – 75%
of investment trusts outperformed open-ended funds investing in similar
assets.
A study from Cass Business School in 2018 found that investment
companies outperformed by an average of 0.8 percentage points a year.
When investment trusts do out-perform their open-ended rivals, as they
frequently have in the past, it can sometimes be explained by a
combination of lower costs (although that advantage has narrowed in the
last few years), the closed-ended structure of the trust and the effect of
'gearing'. 
Here, we explain the impact of these factors on performance.

Investment trusts and the closed-ended structure

Because investment trusts have a limited and constant number of shares,
and are governed by a board of directors, they can arguably take a more
genuine long-term view than their open-ended counterparts. They don't
have to buy or sell the underlying investments until the board really thinks
it's the best time to do so. 
With open-ended funds on the other hand, fund managers have to buy and
sell shares to accommodate investors joining and leaving the fund. This
can mean managers might be forced to transact at inopportune times -
selling when the market is low and buying when it's high, for example.
Of course, as every investment professional is duty-bound to tell you, past
performance is definitely not an indicator of future returns. 
Dividends can play a powerful role in generating an income from
investment trusts. Use our dividend tax calculator to find out how much
you'll pay in 2022-23.
Investment trusts and gearing
Another major difference between investment and unit trusts is that
investment trusts can borrow money to invest, known as 'gearing',
which can have a dramatic effect on the value of your investments.
When stock markets are:

 Rising: gearing is useful because it magnifies any gains you make.

 Falling: gearing will increase your losses.

A trust with a high level of gearing will likely fall further under these
circumstances than trusts with low gearing.
This means the more borrowing a trust has, the greater the capital risk you
face, but you also have the potential for higher returns. The combined
effect of gearing and the discount means investment trusts are likely to be
more volatile than equivalent unit trusts. 
This means if you invest in investment trusts you should be prepared for a
rockier road with bigger ups and downs.
But not all investment trusts gear. The AIC publishes details of each trusts
gearing policy - a gearing rating of 100 means the trust has no borrowing, a
rating of 110 means your gains or losses will be magnified by 10%, etc - in
other words, the trust has gearing of 10% of total assets.

Investment trust costs

Traditionally, investment trusts have had lower ongoing charges than open-
ended unit trusts and Oeics for a few reasons:

 Unlike open-ended funds, investment trusts don't pay commission to

financial advisers;
 There's less admin to pay for because they don't have to deal with
money coming in and out;
 They have independent boards of directors representing the interests
of shareholders - as such they will often negotiate lower annual
charges as trusts grow.

However, as a result of the Financial Conduct Authority's Retail Distribution

Review (RDR), open-ended funds have become cheaper.  Some tracker
funds now have fees well under 1%.
When considering investment trusts, it's also necessary to consider that,
like any other shares, but unlike open-ended funds, your deals will be
subject to stockbroking commission.

 Find out more: are fund charges eating into your returns? -

How to choose an investment trust

There are a few things you should consider when choosing an investment
trust:

 Check to see what level of gearing it has - higher borrowing will

boost your returns if the fund performs well, but will hit you hard if it
falls in value. 
 Check on charges - now that open-ended funds don’t pay
commissions, many have cut their fees. 

In the end, there is no definitive answer to whether investment trusts

or open-ended funds are better. The former have advantages, particularly
when you want exposure to more illiquid assets, but they’re not guaranteed
to outperform – and they may be more volatile over short-term periods.
You should only be investing if you can take a long-term approach – and all
collective investment funds can fall in value as well as rise.