What is an Investment Trust?
An Investment trust is a publicly listed company (PLC) that aims to generate returns for shareholders through investing in a range of assets.
Like any other listed company, investors can buy shares which are publicly traded on the London Stock Exchange.
Why should I invest in an investment trust?
Unlike with a Unit Trust or OEIC an Investment Trust’s structure which is called ‘Closed Ended’ (which basically means it doesn’t need to manufacture new shares whenever someone perhaps like you wants to invest which is what Unit Trust/OEIC’s do) means that it doesn’t need to buy and sell investments as investors buy and sell holdings in the Trust (which could potentially result in it buying high and selling low).
Cost….Investment Trusts on average have a lower cost of ownership with lower overall expenses than other types of similar actively managed investments. This is thanks in part to their independent board members.
Income Investment Trusts may keep up to 15% of the income they receive in any year. This money may be used to supplement income received in future years which means dividends might increase even in bad years, much like a With Profits fund but less opaque.
Borrowing (Gearing) Investment Trusts may borrow to invest (this is known as gearing). Gearing could potentially increase the returns for shareholders, but if assets fall in value it might also increase the potential for losses.
Discounts and premiums – market demand drives an investment trust’s share price so the shares can be worth more or less than the value of a trust’s underlying portfolio – known as the Net Asset Value or NAV. If the share price is lower than the NAV the shares are said to be trading at a discount; whereas when the share price is higher than the NAV they are trading at a premium. Therefore it can be possible to buy shares in an investment trust at a lower price than the value of the assets in the underlying portfolio.
Independent Board Investment Trusts are ran by an independent board of directors who are responsible for safeguarding the interests of shareholders.