What is an investment trust?

Investment Trusts are a type of investment fund. They are the world’s oldest form of collective investment and have been a part of the investment landscape in the UK for 150 years.

Investment trusts are a public company and are listed on a stock exchange. To invest you buy and sell shares just as you would in another public company. Most investment trusts are listed on the London Stock Exchange and because they are traded on the stock exchange they are subject to the same level of scrutiny and corporate governance that governs all UK Public Limited Companies. This includes oversight by a Board of Directors which has the responsibility to act in shareholders’ interests at all times Investment trusts are ‘closed-end funds’. This means they have a fixed number of shares, and you buy and sell shares from another investor. This differs to ‘open-ended’ funds or unit trusts where money is added to or removed from the fund when an investor buys or sells units (redemptions). As investment trusts are closed-ended, in times of market stress, the fund manager is not forced to sell assets to meet redemptions and can take a longer-term view of which companies they own.

Investment Trust vs Unit Trusts

What is a Unit Trust?

A unit trust is a form of collective investment which is managed by a fund manager. Unlike investment trusts, the investment manager can issue new units when there is a demand. As a result, of this, they are referred to as open-ended fund.

Key differences between Investment Trusts and Unit Trusts include:

• Smooth income payments - Unlike unit trusts, investment trusts do not have to pay out all their income to shareholders each year and can ‘smooth’ payments to investors by retaining up to 15% of their income, saving some in years it earns more, to subsidise the years it earns less.
• Gearing - Investment trusts have the ability to make use of gearing for investment purposes, i.e. they are able to use borrowing in order to increase the asset exposure. Gearing is a double-edged sword – when markets go up it can magnify returns but when markets go down it can increase the downside.
• Pricing - Unit trusts are traded through the underlying investment manager and are priced at their Net Asset Value which is determined by the value of the underlying assets. See below FAQ’s on further detail of how investment trusts’ share price works.
• Longer term view - As investment trusts have a fixed number of shares in issue it means that they do not have to sell assets when investors sell their shares, which allows the managers to take a longer-term view.