Useful information for investors
What are investment trusts?
Investment trusts are public companies that seek to make money for their shareholders by buying and selling shares in other companies or assets. They are run by professional fund managers. To ensure that the managers act in the best interests of investors, they are overseen by an independent board of directors.
By investing in an investment trust, you become a shareholder in the company. As a result, you have the right to vote on a range of issues including any changes to the investment policy and the re-election of directors.
By pooling your money with other shareholders, investment trusts enable you to gain exposure to assets that you may not be able to access as an individual.
How do investment trusts work?
Unlike unit trusts and open-ended investment companies (OEICs), investment trusts are closed-ended. They issue a fixed number of shares, which can then be bought and sold on the London Stock Exchange.
The value of the assets held by an investment trust is known as the net asset value (NAV). Shares in an investment trust may trade for less than the NAV (at a discount) or for more than the NAV (at a premium).
The level of premium or discount primarily changes based on changing market sentiment towards a sector and an individual investment trust. If an investment trust is trading at a discount to its NAV and the discount reduces or moves to a premium, investors will make an additional return over and above any return from the trust’s underlying assets. However, if the premium on an investment trust reduces or a discount widens, this will detract from returns.
Investment trusts can borrow money to invest, which is also known as leverage or gearing. This approach can magnify gains for shareholders in a rising market, but also lead to greater losses when markets fall.
