What is an investment trust?

An investment trust is a type of investment company which is structured as a PLC and listed on a stock exchange. Investment trusts have been around since the 1860s, making them one of the most enduring forms of investment vehicle.

Investment trusts are collective investment funds, aiming to deliver returns for their shareholders by managing a portfolio of investments. The portfolios may focus on particular sectors or geographies, such as UK or Asia Pacific equities or on infrastructure projects, such as windfarm construction. Depending on its formal investment objectives, a trust will aim to deliver capital growth, income of a combination of both.

Investment trusts are typically listed on the London Stock Exchange and account for roughly a third of the FTSE 250, according to the exchange. interactive investor estimates that there are around 350 investment trusts available to UK investors.

Closed-end vs open-ended funds

Investment trusts are closed-ended funds, which means they have a fixed number of shares in issue at any one time. Conversely, open-ended funds, issue or cancel shares depending on demand as investors move their money in and out of the fund. Open-ended funds need to be prepared for these redemptions, so typically invest in more liquid assets, such as listed securities.

Because investment trusts are closed-ended, they don’t have to deal with redemptions, which means they do not have to hold cash, or sell stock, for redemption purposes. While many trusts do focus on listed securities, this structure makes it simpler for them to also invest in assets which are less liquid, such as infrastructure, private companies, or property.

Why trust in trusts?

Diversification: By pooling their capital with others, trust investors can access a broader range of assets and spread their risk.

Access to private companies: Trusts allow access portfolios of less liquid assets. So for example, trusts investing in real estate and infrastructure can gain exposure to predictable cash flows derived from long-term contracted revenues, providing income for investors.

Income: Investment trusts, unlike open-ended funds, do not have to pay all their income out each year and can therefore hold some of their income back (up to 15%) which can be used to smooth dividend payments during more challenging years.

NAV-igating discounts and premiums

Investment trusts are listed on stock exchanges, so the value of the shares can diverge from the underlying value of the assets that a trust owns. Net asset value (NAV) is the value of all the investment company’s assets, minus liabilities such as any debt. This can then be divided by the number of shares to provide the NAV per share.

The difference between a trust’s share price and its NAV is known as a discount or premium. If the share price is lower than the NAV per share, the trust is said to be trading on a discount. Conversely, if the share price is higher than the NAV, this is known as a premium. In times of market stress and poor sentiment, discounts tend to widen, but they typically narrow when investors are feeling optimistic.

Independent boards

As PLCs, investment trusts have independent boards of directors elected by shareholders to monitor the performance of the trust and represent shareholder interests. The board is also responsible for appointing a portfolio manager, such as abrdn, to manage the trust’s investment decisions. These independent boards are seen as beneficial to investors as they add an additional layer of scrutiny and oversight.

Gearing

Unlike open-ended funds, investment trusts can use “gearing” or borrowing in order to finance the purchase of assets. When the stock market performs well and the fund manager makes sound investment choices, gearing can amplify income and capital returns over time. However, it also exposes investors to greater market movements, potentially exaggerating losses and increasing volatility.

Reforming cost disclosure rules

Investment Trusts have been in the spotlight in 2024, with abrdn among the voices calling for reforms to cost disclosure rules in order to make investment trusts, and by extension UK capital markets, more competitive. Read more about the campaign here.