Demystifying Financial products- Investment Trusts 101

Demystifying Investment Trusts

An investment trust is a kind of fund set up as a firm or a company, so you can buy and sell its shares on the stock exchange. Their aim is to generate returns for their equity holders by investing in a portfolio of shares, property, or other asset classes, as chosen by the investment manager. When you buy a share you are buying a part of the trust’s underlying portfolio.

The price of these shares depends both on the market value of the underlying assets and on the demand and supply of investment trust shares. In most modern investment trusts, management has complete discretion over the portfolio, subject to general charter provisions.

Investment trusts can be a great tool for portfolio diversification as they can hold a variety of assets: listed equities, government/corporate bonds, real estate, private companies, and so on in different geographies. The investment objectives (growth, income, capital preservation), risk profile (level of gearing, level of diversification via assets and risk factors) vary from one investment trust to another.

Some of the investment trusts are running since the 1860s.

Exhibit 1- Examples of Investment trusts

Source: Trustnet.com
Please note: The above list is for information purposes only and is not a recommendation. Ultimately, Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

How do they differ from funds?

The investment trusts are  closed-ended, meaning that they have a fixed pool of capital. This makes them easier to manage, as investors buy shares on the stock market rather than by buying them from the fund manager. Whereas funds are mostly open-ended, i.e. you buy shares/units directly from the fund manager. 

Because funds are open-ended, a fund manager will have to take the redemptions into account especially during volatile markets when the investors will queue up to pull out money. Whereas, this situation seldom occurs for investment trusts managers, which helps them to plan for long-term goals, thereby reducing portfolio turnover and bringing the trading costs down.

What is gearing in investment trusts?

Unlike funds, Investment trusts also have the flexibility, such as the ability to borrow to invest, known as gearing. The investment manager hopes to make enough money to cover the interest plus make a profit and can increase investment gains, but it does come with risks. However, not many investment trusts use gearing. Some use it moderately. If the total assets of a trust are worth $100 million, and the manager borrows $10 million. The gearing is 110%. See the below table for example.

Exhibit 2- Gearing

Source: https://www.trustnet.com

How have they performed against the funds?

The research by Interactive investor UK suggests that on average, the average global investment trust has outperformed the average global fund by almost one percent (0.95%) a year over the last 10 years, and by a massive 2.62% per year over the last 20 years. Even the studies by the Association of Investment Companies, Cass business school and over five, ten or even thirty years, demonstrated superior growth. See below table

Exhibit 3Sector comparisons – investment trusts (AIC) versus funds (IA)

Source: Source: interactive investor using Morningstar as at 31 January 2021. Total (NAV) Returns for IA (Investment Association) sectors and market (price) returns for AIC (Association of Investment Companies) sectors. Past performance is no guide to the future. The value of your investments and the income form them can go down as well as up and you may not get back the full amount invested. Investment trust figures are share price total return. AIC averages are for investment trusts, IA averages are for funds.

What does trading at a discount to their NAV means?

Investment trusts trade like a normal share on the stock exchange. The price is influenced by buyers and sellers, and the price of the investment trust does not always reflect the price of the underlying assets. If the demand is high, the shares may trade at a premium to their net asset value (NAV). If the demand is low, they may trade at a discount. See Exhibit 1 above for Prem/discount

Skin in the game

While Skin in the game i.e. Managers or investment team having a personal investment in their funds, is no guarantee of success, it offers a level of confidence that they will weigh portfolio decisions carefully and with a long-term perspective. The research by Investec reveals there are 77 investment trusts where managers or the management team have a personal investment in their fund of £1 million or more as at close on 1 June 2021. See below table for the average five-year share price total return of ‘Skin in the Game’ trusts against others.  Past performance is no guide to the future.

What are the costs involved?

The cost of buying (dealing charge) an investment trust share is generally the same as buying an individual company share. There can be a custodian fee for holding an investment if you are dealing through a platform.

Investment trust will also charge a fee (ongoing charge or Total expense ratio) which is built into the NAV. This may include The annual management charge, Fees of professional services firms, such as auditors. The fees of board members, Administration costs. Some investment trusts are almost as cheap as passive funds especially the large investment trusts. See Exhibit 1 for OCF

How can you invest into Investment trusts?

You can invest directly or you can go via an open architecture platform if you want all your investments in one place.

Open architecture investment platforms give you access to a virtually limitless range of listed securities across the world – Equities and fixed income, Unit trusts, Open-ended investment companies, Investment trusts, offshore funds, Hedge funds, Deposits,exchange-traded funds(ETFs), Structured products and many more.

To know more about Open architecture platforms click here to download the write-up or contact us.

Please note: This article is for educational purposes only and should not be construed to be tax, legal or financial advice. The information here is not tailored advice to each individual reader, and as such does not constitute financial advice. Speak to a financial adviser before investing. Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.


  1. Interactive investor- Investment Trusts outperform funds
  2. Trustnet
  3. AIC UK -Guide to costs
  4. Manager with Skin in the game
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Arvind Krishnan
Arvind is a CERTIFIED FINANCIAL PLANNER professional and a proponent of Design Thinking with over 17 years of experience in financial services including product management, training & development, and sales.

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