What is an investment trust?
Investment trusts are public listed companies that aim to generate returns for their shareholders by investing in a portfolio of assets. They issue a fixed number of shares, which are publicly traded on the London Stock Exchange, so investors generally buy and sell from the market rather than dealing directly with a fund management company.
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Why should I invest in an investment trust?
- Closed-ended structure – an investment trust has a fixed pool of assets, which means it is not influenced by inflows and outflows to the underlying capital investment base. The fund manager has the freedom to invest and sell assets when deemed appropriate rather than being forced to make investment decisions driven by market activity.
- Gearing – investment trusts can borrow money to invest more on your behalf (known as gearing). Gearing can therefore potentially increase the returns for shareholders, but if the assets fall in value, gearing can also increase the potential for losses.
- Income – investment trusts can retain up to 15% of their income received in any year. These reserves can be used to supplement income in future years if required. In a number of cases, some trusts have managed to increase their dividends every year.
- Competitive pricing – investment trusts on average have low overall total expenses for the type of active management that is being provided.
- Governance – every investment trust has an independent board of directors who are responsible for safeguarding shareholder interests.
- Shareholder rights – when you invest in an investment trust you become a shareholder in that company, which gives you the right to vote on issues such as the appointment of directors and changes to investment policy.
Further points to consider
- 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.
- Subscription shares – some trusts have issued subscription shares. These are a form of traded option which gives the holder the right, but not the obligation, to buy shares in the company at some time in the future at a fixed price. Subscription shares can be used as part of your stocks and shares Individual Savings Account (ISA) allowance in the J.P. Morgan ISA.
- The value of investments and income from them may fall as well as rise and investors may not get back the full amount invested.
Suitability
You should, of course, only consider investments that are right for you. If you are in any doubt about the suitability of an investment, please speak to an independent financial adviser - find an IFA at unbiased.co.uk.
Essential information
Before investing you should take the time to read all the relevant legal information and make yourself aware of the investment risks involved.
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