Investment Trusts

Investment trusts are a type of collective investment. They are structured as companies and exist purely to invest in a portfolio of shares and securities in other companies to make money for their own shareholders.

They pool investors’ money and employ a professional fund manager to invest in the shares of a wider range of companies than most people could practically invest in themselves. This way, even people with small amounts of money can gain exposure to a diversified and professionally run portfolio of shares, spreading the risk of stock market investment.

Investment trusts are what is known as closed-ended funds. This means that the amount of money which the trust raises to invest is fixed at the start by issuing a set number of shares to investing shareholders. Every selling shareholder must first be matched to a potential buyer via the stock market before a transaction can take place. Having a fixed pool of money enables the fund manager to plan ahead.

Trusts often specialise in particular sectors and types of company. Some might specialise, for example, in communications companies, or alternative energy producers. Others specialise in companies from different parts of the world.

Trusts also specialise in what they aim to give their shareholders. Some try and maximise income. Others aim exclusively for capital growth over the long term. Some trusts aim to provide a combination of income and capital growth. All trusts have investment objectives that will be clearly stated in their literature.

Investment trusts can borrow to purchase additional investments. This is called ‘financial gearing’. It allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to pay the interest on the loan, repay it and then make a profit on top of that. Obviously, the more a trust borrows, the higher risk it’s taking – but the greater the potential returns.

To be eligible to invest in an investment trust, an individual investor must be 18 years of age or over. An investment can also be made by a company or trustee(s). The minimum monthly contribution is normally £100 and the minimum lump sum £500-£1,000. There is no maximum limit.

Most investment trusts allow shares to be sold at any time. You can make partial withdrawals or encash your full investment. The tax treatment is described above.

Past performance is not a reliable indicator of future results