Investment Trusts Explained

An Investment Trust is a closed-ended fund. They are essentially companies that hold shares in other companies and the company is listed on a Stock Exchange.

They will also have an independent board and governance like a company, but are operated by a Fund Manager.

The reason they are referred to as closed-ended is because there are a fixed number of shares, unlike an open-ended fund where a Fund manager will just buy more of the fund’s holdings when investors pile in.

Investment trusts can hold 15% of income each year; dividend sustainability

Some of the benefits of Investment Trusts are that they can hold a large proportion of income to ensure dividends can be paid when things aren’t going so well. So income investors can still benefit. Gearing or borrowing money is another advantage for those seeking capital growth – because the Investment Trust can use the money to make more investments.

Pricing of Investment Trusts is also associated with whether they are at a premium or discount. The former means that the price of the Investment Trust is greater than the assets it holds, but the latter means its price is less than its holdings.

Some other points to note are that Investment Trusts can also specialise in certain areas, holding ‘illiquid assets’ (for example shares in private companies). These can’t be bought or sold easily, hence they are illiquid. Whilst offering access to different assets, they do also present difficulty for investors if the Fund Manager has to sell the holdings due to poor performance (because there’s less of a ready-made market).

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