What is an investment trust?

What is an investment trust?
An investment trust is a public limited company that aims to make money by investing in other companies. Owning shares in an investment trust is a way of investing in a variety of different companies. An independent board of directors is elected by shareholders to monitor the performance of the company and look after shareholder interests. The board chooses a professional portfolio manager, such as BlackRock, to manage the company's investments.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

How do investment trusts compare with unit trusts?
The key difference between investment trusts and other financial products such as unit trusts is that they are run as public limited companies. Investment trusts issue a fixed number of shares at launch and are known as closed-ended funds. This allows them to take a long-term view and borrow money, which allows greater exposure to stock markets in pursuit of higher returns. In contrast, unit trusts are open-ended funds and continue to issue new units in response to demand. Please remember that Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Unit Trusts
Open-end investment vehicles with no fixed number of shares/units available
As more people invest, more units are created
Able to distribute income on a pre-determined basis and unable to hold back cash to distribute in leaner years1
Pooled investment vehicles
Diversified portfolios
Run by investment professionals
Investment Trusts
Closed-end investment vehicles with a fixed number of shares available2
Independent board of directors
Can borrow money to invest i.e. gearing
Can retain up to 15% of any income earned and distribute cash in leaner years3
Can trade at a premium or discount to the value of their underlying investments
Flexibility to invest in assets which trade less easily and frequently
Diversification
Diversification and asset allocation may not fully protect you from market risk.

Liquidity Risk
The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

1Income is not guaranteed and the amount can vary depending on the value of the underlying investments
2New share issuance is strictly controlled by the board and approved by shareholders
3There is no guarantee that income will be paid.

What can investment trusts offer?
Easy access
There are more ways than ever to invest in an investment trust. Alongside traditional routes via stockbrokers, savings schemes and ISAs, fund supermarkets and platforms also offer a range of investment trusts.

Simplicity
Investment trusts are no more complicated for clients to understand than a unit trust, they give investors access to a wide range of investments which may be too complicated or costly to manage as a directly held portfolio.

Income potential
Finding reliable sources of income is becoming harder for investors. Investment trusts can retain as much as 15% of their revenue meaning they can maintain consistent pay-outs through using reserves even in challenging markets. However, not all investment trusts are able to build up reserves and even where there is surplus income it may not be enough to last sustained periods of poor market performance.

Gearing
Investment trusts unlike open-ended funds do not face a restriction on gearing or borrowing. Investment Trusts can borrow at favourable rates of interest. The use of gearing allows clients to benefit from additional exposure in rising markets, but investments may be hit harder when stock prices fall.

Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Accountability
As shareholders, investors in trusts are able to hold the company to account and vote at Annual General Meetings (AGM’S).