What is an investment trust? - J.P. Morgan Asset Management
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What is an investment trust?

A guide to the important features

An investment trust is a public listed company. It’s designed to generate profits for its shareholders by investing in the shares of other companies.

Shares in investment trusts are traded on the London Stock Exchange so investors can buy and sell from the market, rather than dealing with a fund management company.

What makes investment trusts different?

Here are some of the features that make them different from other investments:

  • Closed-ended - an investment trust has a fixed number of shares. The fund manager can invest and sell assets when they feel the time is right; not when investors join or leave a fund. It also means the underlying capital investment base is relatively stable.
  • Borrowing powers - investment trusts can borrow money (known as gearing - see video below) to take advantage of investment opportunities. Borrowing can increase the returns for shareholders, but if the assets fall in value, it can also increase the potential for losses.
  • Income - investment trusts can retain up to 15% of their income in any year (see video below). This can be used to supplement income in future years.
  • Competitive pricing - investment trusts usually have smaller operating costs than OEICs (Open Ended Investment Companies) so their charges are generally lower.
  • Governance - every investment trust has an independent board of directors. They’re responsible for safeguarding shareholder interests.
  • Shareholder rights - when you invest in an investment trust you become a shareholder in that company. This gives you the right to vote on issues such as the appointment of directors or changes to the investment policy.
How much is it worth?
  • The combined value of all the assets the trust holds – that’s Net Asset Value (NAV).
  • Unlike other investment funds, shares in an investment trust can be bought and sold at a price that is higher or lower than NAV. So it’s possible to buy shares in an investment trust at a lower price than the value of the underlying assets.
  • It all comes down to market demand. If the share price is lower than the NAV the shares are said to be trading at a discount. However, when the share price is higher than the NAV, the shares are trading at a premium.

Gearing

In this video gearing, also known as leverage, is explained and why it is important to understand an investment trust's gearing. Topics include a definition of gearing, its impact on returns, and the most common methods used to leverage.

Income

This video describes income investments. It explains the differences between the way dividends work in investment trusts vs. investment funds, and who may be attracted to investment trusts.

Risk warning

The value of your investments and the income from them can go down and up, and you may not get back as much as you paid in. Tax benefits and liabilities depend on individual circumstances and may change in the future.

Past performance is not a guide to the future.