What is an investment trust?

An investment trust is a type of investment fund. It is structured as a public limited company – or PLC. Its shares can be bought and sold on the stock exchange, just like other public limited companies. Investment trusts have been around since the 1860s, making them one of the oldest types of investment fund around.

Investment trusts look to make returns for their shareholders by managing a portfolio of investments. Every investment trust has a formal investment objective which details which markets or sectors they invest in. The objective will also indicate if the trust aims to deliver capital growth, income or a mix of both.

What are the features of investment trusts?

As a public limited company (PLC), investment trusts offer some important features:

Tradable shares – You can invest in an investment trust by buying its shares and becoming a ‘shareholder’. This entitles you to vote on issues affecting the company and to receive any dividend that the company chooses to pay out. The share price of an investment trust can rise and fall – which also offers the potential for your investment to rise or fall in value.

Dividends – Like other PLCs, investment trusts may pay their shareholders an annual ‘dividend’ out of the profits they make from their investments. Dividends are not guaranteed and can rise and fall from year to year. Investment trusts can smooth out their income payments by holding back profits in good years to pay out in poorer years.

Board – Each investment trust has a board of directors and a chair to oversee the operation of the company and that it is managed in the best interests of shareholders. The board has the power to set charges and costs on the trust and appoint (or fire) an asset manager to manage the portfolio.

Discounts & premiums – A trust’s share price is driven by investor demand in the marketplace. So it can be higher (at a premium) or lower (at a discount) than the value of its underlying assets. This is a big difference from other types of funds such as unit trusts and Open Ended Invesment Companies, whose price directly mirrors their underlying portfolio.

Gearing – Investment trusts can borrow money to invest, as well as using their share capital. This can help generate additional returns for investors – but it can also potentially increase losses and make the value of the portfolio more volatile. So it’s important to check the level of gearing is right for you.

AGMs and annual reports – Investment trusts keep their shareholders informed about their performance through half-yearly and annual reports and by holding an annual general meeting (AGM). At the AGM, shareholders can hear from the board and investment manager and vote on issues. They can also propose motions in advance to be voted on.

What are the benefits of investment trusts?

Like other types of investment fund, investment trusts offer important benefits such as:

A team of professionals to choose investments on your behalf
A ready-made portfolio holding a range of different investments which can help spread risk
A clear investment objective – so you can choose which trust is right for you
A price that can (usually) be tracked daily so you can follow your performance.

Want to learn more?

If you’d like to know more about investment trusts and how they work, visit the AIC website.*

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