What is an investment trust?
Similar to funds, investment trusts are ‘collective’ investments which pool your money with other investors. The professional investor that manages the trust uses that money to buy and sell a wide range of investments on your behalf, in order to achieve a trust’s objective.
Investment trusts are structured differently to funds – they are listed companies with an independent board of directors and a fixed number of shares available to purchase. Similar to shares, the price changes throughout the day as the shares are traded, based on investor sentiment and the performance of the underlying investments.
Why invest in investment trusts?
- Instant diversification without a large investment
- Over the long term, investment trusts tend to outperform funds due to their various structural advantages
- Much more consistent at raising or maintaining dividend payments compared to funds, due to their ability to hold back up to 15% of income generated every year
- Invest generically in regions, sectors or investment types (and non-traditional assets e.g. infrastructure, private equity, or unlisted companies)
Investment trust charges
Most investment trusts quote an 'ongoing charge', a yearly fee that is levied. Charges vary, but a fee of around 0.85% is typical for a trust investing in a developed market, such as the UK.
Things to be aware of
Premium vs. discount
Since the share price depends on supply and demand, investment trusts can trade at a premium or discount to the net asset value (NAV). Investors can benefit from buying at a discount, providing the discount gets smaller. It can, of course, work against investors if the discount goes the other way and increases, which will instead magnify losses.
Investment trust managers have the option to borrow money if they spot a good investment opportunity, but don’t have any spare cash. The ability to gear can boost performance if markets rise, but greater losses can occur if the market falls
If a trust is small or not traded frequently, it will have a larger gap between the buying and selling price (the ‘spread’). Be mindful of this.
How to invest in investment trusts
Learn more about investing in trusts with ii on our investment trusts page.
These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The value of your investments, and the income derived from them, may go down as well as up. If in doubt, please seek advice from a qualified investment adviser.