Investment Trusts Explained

Closed-ended

Unlike unit trusts and OEICs (open-ended investment companies), investment trusts have a fixed number of shares in issuance at any one time.

In contrast, unit trusts and OEICs continue to issue new units in response to demand, meaning it can expand or contract as investors move their money in and out, while an investment trust remains intact.

This gives investment trusts the flexibility to hold assets that are less liquid, or in other words, more difficult to buy and sell.

Long time horizons

Investment trusts are an evergreen structure. Unlike open-ended funds, where a manager needs to sell portfolio holdings to return money to persons that have sold the trust, an investment trust portfolio remains intact. When sales of shares outweigh purchases, the value of the shares fall. With permanent capital to invest, many managers lengthen their investment horizons and choose to hold less liquid assets. Many trusts have been in existence for a century or more.

What type of assets can investment trusts invest in?

Investment trusts can invest in a wide variety of asset classes including stocks, bonds, property, private equity and other financial instruments. Owning shares in an investment trust is often an effective way of investing in some of the world’s most dynamic companies, markets and regions.

Investment trusts can put cash away, or place into reserves, as much as 15 per cent of their revenues. This means a trust can add to these reserves when it receives high levels of dividends, and then use these reserves to add to the dividends paid to the trust’s shareholders in leaner years. Thereby smoothing the level of income.

Net Asset Value (NAV) is the value per share of the investment portfolio and other assets owned by the investment trust. It is calculated by deducting the total liabilities from the total assets and divided by the number of shares in issue at that moment in time.

The role of the investment manager

It is the job of the investment managers, or ‘fund managers’, to manage the portfolio of investments and produce a return for shareholders. They work to a clear set of guidelines set out in the Investment Policy, which is available for all to see. The board of directors hold the investment managers to account on behalf of shareholders and should the need arise, could choose to change investment manager.

Meet the Managers →

Independent board of directors

Investment trusts have an independent board of directors who are there to look after shareholders’ interests. It has various areas of responsibility, such as overseeing the performance of the investment managers, deciding on the dividend, and reporting to shareholders.

Meet the Board →

Owners as shareholders

As a shareholder, you have rights, including the right to vote on proposals put forward by the board, such as the level of dividend, change of investment policy or change of investment manager.

Corporate Broker – An investment trust broker facilitates trading in the trust’s shares, advises on share buybacks and issuance, market strategies, and regulatory compliance to maximise shareholder value.

Auditor – An investment trust auditor ensures financial statements’ accuracy, compliance with regulations, assesses risks, and provide independent assurance on financial integrity.

How to buy and sell an investment trust?

Investment trusts are easy to access, and most persons and institutions can invest in them. Most savings platforms offer a range of trusts, they are also available via stockbrokers, ISAs, and savings schemes.

Liquidity

Investment trust shares are tradeable on the London Stock Exchange. Liquidity refers to how easily and quickly shares in trusts can be bought or sold. High liquidity means there are lots of buyers and sellers, allowing for smoother transactions. Liquidity is influenced by several factors including: marketability; amount of shares traded; bid-ask spreads; who holds the shares in that trust; market conditions and/or sentiment; and regulatory environment.

Can I use my ISA allowance to invest in an investment trust?

Yes. ISAs allow you to purchase and hold investment trusts in a tax efficient manner. The favourable tax treatment of ISAs is subject to individual circumstances and government legislation, as such, it is subject to change.

What are the associated fees and charges?

There are fees and charges associated with investing in investment trusts. These are trust specific and will vary depending on the type of assets held, and the manager you invest with. An additional factor to consider are the additional fees you may incur if you have sought independent financial advice.

Do investment trusts pay dividends?

Investment trusts are listed companies and therefore have the ability to pay dividends, however, not all do.

Is there a minimum or maximum investment?

Investment trusts generally have no minimum or maximum investment limits. However, minimum investments are typically determined by the cost of a single share, which can vary widely. Some trusts might have set minimum investment amounts, if bought directly through the fund provider. There is no maximum investment limit, but large investments might require additional considerations regarding market impact and regulatory compliance.