Here are some of the features that make them different from other investments:
Closed-ended – an investment trust has a fixed number of shares.
The fund manager can invest and sell assets when they feel the time is right; not
when investors join or leave a fund. It also means the underlying capital investment
base is relatively stable.
Borrowing powers – investment trusts can borrow money (known as
gearing) to take advantage of investment opportunities.
Borrowing can increase the returns for shareholders, but if the assets fall in value,
it can also increase the potential for losses.
Income – investment trusts can retain up to 15% of their income
in any year. This can be used to supplement income in future years.
Competitive pricing – investment trusts usually have smaller operating
costs than OEICs and SICAVs, so their charges are generally lower.
Governance – every investment trust has an independent board of
directors. They’re responsible for safeguarding shareholder interests.
Shareholder rights – when you invest in an investment trust you
become a shareholder in that company. This gives you the right to vote on issues
such as the appointment of directors or changes to the investment policy.
The combined value of all the assets the trust holds – that’s Net Asset Value (NAV).
Unlike other investment funds, shares in an investment trust can be bought and sold
at a price that is higher or lower than NAV. So it’s possible to buy shares in an
investment trust at a lower price than the value of the underlying assets.
It all comes down to market demand. If the share price is lower than the NAV the
shares are said to be trading at a discount. However, when the
share price is higher than the NAV, the shares are trading at a premium.
Some trusts issue subscription shares. These shares give the holder the option to
buy full shares in the trust at some time in the future at a fixed price.