Investment Trusts 101

Investment trusts are a type of collective investment vehicle that allows individuals to pool their money together to invest in a diversified portfolio of assets.

They can be listed on a stock exchange, making it easy to buy and sell shares, or unlisted, which can be more complex.

Investors can buy and sell shares in investment trusts, just like they would with individual stocks.

Investment trusts can be a great way to gain exposure to a wide range of assets, including stocks, bonds, and property.

They can also provide a cost-effective way to invest, as the costs are spread across the entire portfolio.

Investment trusts are managed by professional fund managers who make investment decisions on behalf of the trust.

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An investment trust is a type of fund that raises money by selling shares to investors in a one-time public offering.

Each share, known as a unit, represents a portion of the trust's ownership and gives the investor a proportional right to income and capital gains.

The performance of the trust's investments, minus fund fees, determines the investment return, which is generally fixed.

UITs typically hold the securities they invest in for the life of the fund, which is determined at the time of the initial offering.

Investors can usually redeem their shares early if their investment goals change, but UITs are designed to be held for the life of the fund.

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Investment trusts offer a wide range of opportunities to investors, spreading money across several stock markets around the world.

You can opt for a global trust or focus on a specific market like the UK or the Far East. Just be aware that buying foreign investments comes with currency risks, where a falling pound can increase your gains.

Investment trusts specialise in various areas, so wherever you see an opportunity for long-term investment, you'll likely find a trust that matches your interests.

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Split capital investment trusts are a type of investment trust that issues more than one type of share, such as zero dividend preference shares and income shares. Most split capital trusts have a limited life determined at launch, typically five to ten years, although this can be extended by shareholder vote.

There were only 12 split capital trusts left in existence by 2018, each with only two classes of share: zero dividend preference shares and ordinary shares.

The number of share classes in a split capital trust can be quite complicated, with some having as many as five different types of shares. Here are the typical types of shares found in a split capital trust, listed in order of priority and increasing risk:

The order of priority for paying out shareholders at the wind-up date is typically debt, zero dividend preference shares, income shares, and then capital shares. However, this may vary slightly from trust to trust.

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Investment trusts can be classified into various sectors based on the assets they hold and their investment objectives.

The Association of Investment Companies classifies investment trusts into different sectors, with the largest sectors by assets under management in December 2017 being Global, Private Equity, UK Equity Income, Infrastructure, and Specialist Debt.

Investment trusts can hold a variety of assets, including listed equities, government and corporate bonds, real estate, and private companies.

The sector classifications were revamped in spring 2019 to reflect the growing number of investment companies investing in alternative assets, with the amount of money invested in alternative assets growing from £39.5bn in 2014 to £75.9bn in 2019.

The new sectors included Debt – Direct Lending, Debt – Loans & Bonds, and Debt – Structured Finance, as well as Property – UK Commercial, Property – UK Healthcare, and Property – UK Residential.

These changes aimed to provide a more accurate representation of the investment trusts' activities and to help investors make informed decisions.

The equity sectors were largely unchanged, but Asia was split into three new sectors: Asia Pacific, Asia Pacific Income, and Asia Pacific Smaller Companies.

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Collective structures can be a great way to start building your portfolio, often with low costs that help with diversification from the beginning.

Funds, ETFs, and Investment Trusts are examples of collective structures that can provide a solid foundation for your portfolio.

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Investment trusts are structured in a way that's quite different from other investment options. They pool investors' money together from the sale of a fixed number of shares when they launch.

The board of an investment trust typically delegates responsibility to a professional fund manager to invest in a wide range of companies. This allows investors to diversify their portfolio and potentially earn higher returns.

Investment trusts often have no employees, only a board of non-executive directors. This keeps costs low and ensures the focus is on investing, not on running a large organization.

Investment trust shares are traded on stock exchanges, just like other public companies. The share price may not always reflect the underlying value of the share portfolio, leading to a discount or premium to the net asset value.

Real estate investment trusts are a type of investment trust in the United Kingdom. They must be UK resident and publicly listed on a stock exchange recognised by the Financial Conduct Authority.

In order to qualify as a REIT, they must distribute at least 90% of their income. This is a key characteristic that sets them apart from other investment trusts.

There are two main types of REITs: investment funds and investment trusts of the United Kingdom.

Investment trusts are formed when investors pool their money together to buy a fixed number of shares. This money is used to invest in a wide range of companies, often more than an individual could invest in themselves.

The board of directors typically delegates this responsibility to a professional fund manager. This manager is in charge of making investment decisions on behalf of the trust.

Investment trusts often have no employees, only a board of directors comprising non-executive directors. This is a key characteristic of investment trusts.

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Investment trust shares are traded on stock exchanges, just like other public companies. The share price may not always reflect the underlying value of the trust's share portfolio.

Investment trusts may borrow money to enhance investment returns, a practice known as gearing or leverage. This is a key difference between investment trusts and UCITS funds.

Unit trusts and OEICs are different from investment trusts in that they're open-ended, allowing investors to buy and sell units freely.

Investors can buy into a unit trust or OEIC at any time, as the manager creates new units to accommodate the new investment.

The manager may have to sell investments or parts of them to cancel units when investors want to sell.

Investment trusts, on the other hand, are closed-ended, with a limited number of shares in existence.

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Investment trust operations involve the management of investment portfolios by professional trustees.

Investment trusts can be listed or unlisted, with listed trusts being publicly traded on stock exchanges. They can also be open-ended or closed-ended, with the latter typically having a fixed number of shares.

Investment trusts are required to have a minimum of two directors, one of whom must be independent.

Gearing allows investment trusts to borrow money to invest in more assets, increasing the size of their investments.

This can be a double-edged sword, as it can either deliver better returns or cause greater losses.

Investment trust managers may use gearing when they see a rise or potential rise in a particular sector or stock's share price.

More shares in an investment with a rising value will boost investments, bringing greater potential for both income and growth.

However, when share prices are falling, gearing can exaggerate any losses.

In other words, while gearing can potentially increase returns, it can also amplify losses.

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Investing in an investment trust can be a great way to grow your wealth, but it's essential to understand the concept of premiums and discounts.

A premium occurs when the share price of a trust moves above its net asset value (NAV), while a discount happens when the price falls below the NAV.

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Investors often look for trusts trading at a discount because they can buy shares at a cheaper price than at other times. For example, if a trust is trading at a 10% discount, you can get an investment worth £100 for £90.

Remember, buying a shareholding in an investment trust should be for at least five years, but preferably longer, to give the growth in the trust time to offset any negative effects from changes in the discount.

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Investment trusts have annual fees for professional management, just like unit trusts and OEICs.

These fees are a trade-off for the expertise and research that goes into managing your investments.

Unlike unit trusts and OEICs, investment trusts are structured like public limited companies and listed on the stock market, which means you can buy and sell shares in them as you would any other listed company.

This also means there's usually a bid-offer spread, where the buying price is higher than the selling price.

This can be a consideration when buying or selling investment trusts, but it's not unique to them.

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Taxation is an important consideration when it comes to investment trusts. Profits from selling shares in investment trusts are subject to capital gains tax (CGT), but there's an annual exemption of £3,000 for the current tax year.

Investment trusts can usually be held in a stocks and shares ISA, where income and gains are sheltered from tax. In the 2024-25 tax year, you can put up to £20,000 in your ISAs.

Investors can also buy investment trust share holdings in a pension plan, such as a self-invested personal pension (SIPP). Most investors qualify for income tax relief on money they put into their SIPPs, up to the maximum annual limit of £60,000.

To be eligible for tax relief, you must be resident in the United Kingdom and derive most of your income from investments. Investment trusts that meet these criteria are generally not taxed within the investment trust, avoiding double taxation.

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Here are the key requirements for an investment trust to be eligible for tax relief:

Investment trusts must also not hold more than 15% of its investments in any single company (except another investment trust) and must not be a close company.

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Investment trusts charge an annual fee for professional management, just like unit trusts and OEICs.

This fee is typically deducted from the fund's assets, which can impact your returns.

Unlike unit trusts and OEICs, investment trusts are structured like public limited companies and listed on the stock market, allowing you to buy and sell shares like any other listed company.

As a result, investment trusts often come with a bid-offer spread, where the buying price is higher than the selling price.