What is an Investment Trust?

An investment trust is a public listed company. It’s designed to generate profits for its shareholders by investing in the shares of other companies.

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Buying and selling

Shares in investment trusts are traded on the London Stock Exchange. So investors can buy and sell from the market, rather than dealing with a fund management company.

J.P. Morgan investment trust range

What makes investment trusts different?

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.

How much is it worth?

Net Asset Value, discounts and premiums.

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.

Subscription shares

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.

More about subscription shares

Is an investment trust right for you?

If you’re not sure that an investment trust is the right investment for you, speak to a financial adviser.

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