Investment trusts

Rather than dealing with a fund management company, as is the case for Unit Trusts and OEICs, an investment trust is actually a public limited company (PLC). Shares in investment trusts are traded on the London Stock Exchange (LSE). This allows investors to buy and sell from the market. As an investor in the investment trust, you pay for the shares and the money you pay is invested by the investment trust. Each trust will have their own aims, strategies and track record.

How are investment trusts priced?

If the investments bought by a trust perform particularly well, share prices may increase. Because investment trusts are listed on the LSE, their share prices are subject to the market forces of supply and demand. This influences the share price to the extent that the price per share may total more or less than the total value of the assets held by the trust (known as the Net Asset Value or 'NAV'). If you buy shares for less than the NAV, it's known as buying at a 'discount.' If you buy shares for more than the NAV, it's known as buying at a 'premium.'

Investment trusts vs unit trusts and OEICs

Investment trusts differ from other types of pooled investment in a few key ways. Investment trusts:

  • Are closed ended, meaning that there are a finite number of shares available at any one time
  • Have a board of directors, independent from the fund manager, whose job is to look out for the shareholders' interests
  • Can borrow money in order to invest in the fund (known as gearing)

Benefits of investment trusts

An investment trust allows you to spread your risk by investing in lots of different companies (known as diversification) without having to research every individual company yourself or needing the capital to invest in each one directly.

As a shareholder, you have some say in how the trust is run, and can attend the Annual General Meeting (AGM).

A fixed number of shares means that money isn't flowing in and out of the fund unpredictably, allowing the fund managers to plan ahead.

The option for the fund manager to use gearing means that there is the potential for greater returns – but also greater losses.

How to buy into an investment trust

Shares in investment trusts can be bought on the LSE. As with other types of investment fund, you can invest through a Stocks and Shares ISA to mitigate the impact of tax on your returns.

There is no one-size-fits-all investment strategy, and investing will involve some level of risk. If you're unsure about the best option for you, consider taking financial advice.

Last updated: 03 June 2015