Investment Trusts Guide

Investment Trusts are publicly limited companies, which invest in other companies and assets. When you purchase shares in these companies, you are indirectly investing in that pool of underlying investments. Investment Trusts can invest in a range of different assets such as stocks & shares, government debt, and private companies, but generally they have an investment strategy/objective, which will guide how the Investment Trust invests its money. A team of investment managers usually decide what investments are made.

Shares in Investment Trusts are bought and sold on a stock exchange and the price of an Investment Trust’s shares is determined by their market value. Therefore, if there is a sudden demand for an Investment Trust’s shares then their price will go up even if the value of their portfolio has not changed. Similarly, their price will go down if there is insufficient demand. Investors will still use the underlying portfolio’s value to see if the stock is worth investing in (see Premium or Discount in the glossary).

Investment Trusts offer investors the chance of both regular dividends and capital growth, although these are not guaranteed. Investment Trusts usually publish an annual target dividend per share (e.g. 3p per share). Any excess cash will generally be reinvested.

Another key feature of an Investment Trust is that they can borrow money to invest and/or purchase new assets. This is known as gearing or leveraging. This allows them to invest in new companies or assets, even if they do not have the funds available. However, this is a riskier operation and may increase the size of future losses if they are unable to pay off the debt.

What’s the Difference between Investment Trusts and Funds?

From an investor’s perspective it seems like Investment Trusts operate in similar ways to Funds (see Fund Guide here). However, the key difference between an Investment Trust and a Fund (unit trust or OEIC) is that with Investment Trusts the number of shares is fixed. Investment Trusts are therefore described as closed-ended investments. As described above, shares in Investment Trusts are bought and sold on a stock exchange; whereas you may invest in a Fund by buying new shares directly from the fund. Funds are therefore described as open-ended investments, and their share price is directly linked to the value of the underlying investments.

How Green are Investment Trusts?

Investment Trusts can invest in a range of assets, such as stocks and shares, bonds, private companies and property. Unlike funds, renewable focused Investment Trusts can directly own renewable generating assets and therefore it is much easier to analyse how green they are.

However, some green-focused Investment Trusts invest only in other companies. Therefore, it is more difficult to judge how green their investments are without looking in great detail at the companies they invest in.

See this article for more analysis on how Green Investments are.

How to Invest?

There are several ways in which you can invest in an Investment Trust. The easiest way is via an online investment/fund platform. These platforms will buy and sell shares in an Investment Trust on your behalf (for a fee). See our guide on Online Investment Platforms for more details. You may also purchase shares through a stockbroker or financial advisor, who will purchase the shares directly from the stock exchange where the shares are listed.

ISAs

In the UK many Investment Trusts can be placed within individual savings accounts (ISAs) for tax-free investing (currently up to a value of £20,000 per tax year). See our ISA Guide for more details.

Fees

Most Investment Trusts will produce a Key Investor Information Documents (KIID), which details key information regarding the Investment Trust. The associated charges/fees are given in the KIID. These fees are usually automatically deducted from your shareholdings or dividend.

• The entry fee is a one-off charge on the amount initially invested.
• The exit fee is a one-off fee on the amount being withdrawn from an investment.
• The ongoing charges fee (OCF) covers the continued running and administration of the Investment Trust. It is given as percentage of amount invested and is usually calculated on an annual basis.
• The performance fee is a conditional charge, which you will only pay if the Investment Trust achieves a certain level of performance (usually measured by a level of return or capital growth within a given time frame).

There will also be a fee levied by the online platform (platform fee) or your financial advisor (or stockbroker) for handling the transaction and/or managing the investment. Be aware that fees will eat into your potential returns, so you must take them into account when considering investing in an Investment Trust.

Risks

All investment carries an inherent risk of financial loss. Due to the fact that green-focused investment trusts invest in a specific industry they are at risk from renewable industry wide shocks. For example, a change in government may create a change in the regulatory environment, which may reduce future earnings. Some Investment Trusts will be riskier than others.

The KIID details the risk and reward profile of the investment trust. This is a numerical scale from 1 to 7, where 1 indicates the lowest level of risk and 7 indicates the highest level of risk. The fund’s score will be indicative of how risky the investment is.