Investment trusts are a well-established way of investing. Many investors prefer to invest in a fund rather than by picking individual stocks, shares or other assets. Funds allow you to diversify your portfolio easily, as well as giving you the chance to benefit from the expertise of fund managers.

They are set up as listed companies issuing shares that can be traded on the London Stock Exchange. Like any company, they issue a fixed number of shares – hence the term ‘close-ended’ – to raise capital that the manager allocates to investments.

Right to vote on issues

When you invest in an investment trust, you become a shareholder in that company. This gives you the right to vote on issues such as the appointment of directors or changes to the investment policy. If shareholders in the trust want to sell shares, their decisions don’t impact directly on the value of the manager’s pot, enabling a relatively long-term view in investment decisions.

Investment trusts usually have smaller operating costs and lower charges than other types of funds, for example, OEICs (Open-Ended Investment Companies) or unit trusts. Unit trusts and OEICs have an open-ended structure, which means the fund manager simply creates more units when more people want to own that fund, and vice versa.

Less liquid asset classes

Investment trusts enable investors to invest in a more diverse array of assets, including less liquid asset classes such as private equity, commercial property and infrastructure. This liquidity issue is important. If an investor in a trust wants their money back, they simply sell the shares.

Trading at a premium

Investment trusts have two valuations. One is the share price, which is the price you will pay to buy the investment or what you will receive if you sell it (disregarding spreads and trading costs).

The other is the Net Asset Value (NAV), which is the value of the underlying investments. If the trust is trading at higher level than its NAV, it is said to be ‘trading at a premium’. and if lower, it is ‘trading at a discount’.

Gearing, or borrowing, is something open-ended fund managers are not allowed to do. Borrowing to invest more at opportune times can lift returns per share by more than the cost of the loan per share. But if the market falls, investors in geared trusts may lose more per share than those in ungeared trusts.

Profits for ‘smoothing’ purposes

In the current low interest rate environment, funds that pay a regular income are very attractive. Unlike open-ended funds, investment trusts are allowed to keep back 15% of their profits for ‘smoothing’ purposes. This means trusts can use the income they keep back to help them pay dividends in years that are less fruitful.

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