Investment Trusts

What are Investment Trusts

An investment trust, like a unit trust, or an OEIC ("Open Ended Investment Company"), is a collective, or mutual, investment, which pools together monies from multiple investors in to a single investment fund. Unlike those forms of open-ended investment, however, investment trusts involve a fixed amount of capital, divided into shares, and are therefore closed ended investments.

In addition, investment trusts may involve a process of "gearing" – that is, the borrowing of money, by fund managers, for investment in shares that they believe will perform well – whereas with unit trusts this is not possible. Gearing can, of course, be to the benefit or detriment of the fund as a whole, depending on how the market actually performs.

Investment Trust Features, Benefits & Considerations

Investment trusts allow investment in different companies, both high and low risk, and for different purposes, according to the requirements of individual investors; some, for example, may wish to receive regular dividend income, perhaps with the possibility of some capital growth, while others may prefer capital growth at the expense of dividend payments (so-called "zero-dividend preference" shares).

Investment trusts, themselves, are companies in which investors buy shares. This means that share prices are affected by the law of supply and demand, and can fluctuate more often, and more widely, than, say, units in a unit trust. If demand is high, selling stocks and shares in an investment trust may be easy, but if not, investors may need to lower share prices to make them attractive to buyers. This means that the value of investment trust shares actually reflects not only the value of underlying assets, but also the popularity of the shares, themselves, in the market. Any disparity between the value of shares in an investment trust and its underlying assets – known as NAV, or "Net Asset Value" – can magnify gains derived by shareholders, but this is equally true of losses incurred.

Investment trusts are run, independently, by a board of directors, which – like the board of any shareholder-owned company – is responsible for acting in the best interest of its shareholders. This typically means that annual management charges are low – around 0.5% on average – and, because investment trusts are listed on the stock market, they incur the costs normally associated with buying shares, but no initial fee, per se. Investment trust shares can be bought through a stockbroker, or directly from the management company, and shares can be held in an ISA ("Individual Savings Account") to protect them from liability for capital gains tax.

There are more than 300 investment trusts – with combined assets of tens of billions of pounds – available to investors in the United Kingdom. There are no restrictions on where, and in which types of company, an investment trust may invest. Investment may therefore be spread across the stock markets of the world – including relatively high risk, emerging markets – or confined to a specific geographical region, such as the United Kingdom, Europe or the Far East.

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