Investing in investment trusts

Investment trusts are a collective investment – that is, a range of individual investments chosen and looked after by an investment manager. But compared to other collective investments, such as unit trusts or OEICs, they have several unique features.

First seen in the 1860s, investment trusts are by far the oldest collective investment type. Despite the name, they’re not trusts but companies listed on the Stock Exchange. To invest in them, you buy shares – the price of which is dictated not just by the value of the underlying assets, but also by supply and demand.

These differences make investment trusts attractive to some investors, who believe they can outperform other fund types. But investment trusts can also be more volatile as they can trade at a premium or discount to their net asset value and can use gearing. Before you invest, remember that prices can fluctuate, and you could lose money as well as make it.

Russ Mould, AJ Bell Investment Director runs through how to choose an investment trust

Key features of investment trusts

  • Portfolio diversification – investment trusts offer exposure to many different assets with just one investment

  • Expert management – the trust's investment management team make the day-to-day decisions. As investment trusts are public companies, there’s also a board representing the interests of shareholders, i.e. you

  • Choice – pick from over 450 investment trusts spanning all major geographical regions and mainstream and specialist sectors. Or narrow the field with our Investment trust select list

  • Traded on the Stock Exchange – investment trusts trade in exactly the same way as individual company shares. You can see their price at any time of the day and deal at any point when the market is open

  • Potentially higher rewards and risks – investment trusts trade at a discount or premium, and often borrow money to invest: known as gearing. This means you can potentially amplify your returns, but on the flipside, amplify any losses too

Before you invest in an investment trust, it's important to understand the two main ways they differ from other types of collective investments like funds and ETFs.

Premiums and discounts

The total sum of an investment trust’s holdings, minus any liabilities, is known as its net asset value (NAV). One of the key things to understand about investment trusts is that you can buy them for less (a discount) or more (a premium) than their NAV.

This feature can seem confusing. But it happens simply because investment trusts are set up as companies and traded independently on the London Stock Exchange. Like other listed companies, the value of its shares depends on market sentiment – i.e. what investors think they’re worth.

For example, let’s suppose an investment trust has an NAV of £1 per share. If it was trading at 95p per share, you could buy it at a ‘discount’ to NAV of 5%. Conversely, if it was trading at £1.08 per share, you would be buying it at a ‘premium’ of 8% – i.e. paying more than the value of its underlying assets.

Buying shares in an investment trust at a discount is often billed as a good investment opportunity. But it’s not quite that simple. There are a number of reasons why investment trusts might trade at discount:

  • Low confidence in the trust's management
  • The sector the trust is in is struggling, or out of favour
  • Fear of high liquidation costs if the trust was to wind itself up, sell off its assets and return the proceeds to shareholders

It’s rarer for investment trusts to trade at a premium. When they do, it’s usually because of demand for the expertise of the investment manager. But before investing in a trust trading at a premium, it’s a good idea to exercise caution.

You can find out the NAV and premium or discount for each investment trust on its research page on our site. Just remember that investment trusts are designed to be held for the long term – five years or more.

Gearing

The other big way investment trusts differ from other funds is that they can borrow money to invest. This is known as ‘gearing’.

Let’s say a trust raises £100 million from investors and borrows £10 million from the bank, meaning it has a total of £110 million invested. In this case the trust is 10% geared.

If the trust earns an investment return on the borrowed money that’s higher than the interest the trust pays on its loan, the gearing is good for shareholders, helping to increase returns overall. When markets rise, the share price of a geared trust will rise faster.

But when markets fall, a geared trust’s shares will fall further, which can be alarming. Over short periods of time, gearing can make investment trusts riskier and their shares more volatile than other investments.

There are, however, strict limits on how much gearing an investment trust can use. A maximum of 25% to 30% is common, though in practice most trusts don’t go this high.

Need help choosing an investment trust?

How do I invest in investment trusts?

You can hold investment trusts in ISAs, SIPPs and Dealing accounts with us. Investment trusts can be bought at any time during stock market trading hours at real-time prices.

To buy an investment trust, you’ll need to open one of the above accounts if you don’t have one already. It’s easy to search all available investment trusts using our screener or order them by price, performance and other benchmarks with our quickrank tool.

There’s a £9.95 dealing charge when you buy or sell an investment trust online. Or you can invest regularly for £1.50. Our custody charge for holding an investment trust is 0.25% a year (capped at £25 per quarter for SIPPs and £7.50 per quarter for ISAs and Dealing accounts), and you’ll pay an ongoing charge to the investment trust itself. Visit our charges and rates page to learn more.

Save regularly in an investment trust

We’ve a wide range of investment trusts you can invest in regularly – for a monthly dealing charge of just £1.50.

To set up regular investing, just choose your investment trust and how much to put in. We’ll buy it for you automatically each month – a handy way to get into the saving habit. Our regular investing page tells you more.

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Our Dealing account is low cost and unlimited. Invest as much as you want, whenever you want.

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Build a nest egg for your children with our Junior ISA, Junior SIPP and Dealing accounts for children.

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Invest up to £4,000 per year in our Lifetime ISA and get a government bonus of up to £1,000.

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