Investment trusts

Overview

An investment trust is a closed-ended fund structure which means it’s a public limited company listed on the stock exchange with a fixed number of shares in issue that just purely exists to hold a portfolio of investments on behalf of its shareholders. 

How they're priced

The price of investment trust shares is set like any other listed company, with the forces of demand and supply driving price since their shares trade on the open market rather than being fixed to the underlying value of the portfolio.

This means that a trust’s share price can trade at a premium (which is above) or a discount (below) its Net Asset Value (NAV) depending on factors such as investor sentiment and how liquid the shares are. This dynamic creates both risk and potential opportunities that an OEIC cannot. 

Gearing

The standout structural feature which is what separates investment trusts from OEICs is called gearing. Due to the fact that a trust is a company, it is able to borrow money to invest alongside shareholders’ capital, which amplifies gains in rising markets and also losses in falling ones, a key distinction between OEICs and trusts. 

Governance

Investment trusts have an independent board of directors whose job is to oversee the fund manager on shareholders' behalf, including the power to replace the manager if performance or conduct falls short: a structural safeguard that OEICs don't have in the same form, since there's no equivalent independent board sitting between investors and the ACD.

Examples

Scottish Mortgage Investment Trust: A global growth equity fund. 

City of London Investment Trust: Which holds an unbroken record of dividend increases 

3i Group: 3i Group primarily prioritises private equity investments. 

Regulation

Since investment trusts act as listed companies, they fall under the Companies Act and the Financial Conduct Authority (FCA) rules, with the Association of Investment Companies (AIC) acting as the sector's dedicated trading body. 

Advantages and disadvantages

The advantages include the potential for gearing, which can strongly enhance returns much more than an OEIC is able to. Furthermore, the possibility of buying at a discount to NAV can give investors opportunities to buy undervalued assets. 

The disadvantage is that share price volatility can be greater than the underlying NAV would suggest, which can affect investor performance heavily. Also, smaller, less-traded trusts can suffer from limited liquidity, meaning that it’s harder to buy or sell in large amounts without moving the price.