Understanding investment trusts
Here we explain what investment trusts are, how they work, and highlight some of the benefits they can offer investors.
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.
Equity Risk
The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.
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.
Leverage Risk
The use of leverage may increase the Fund's volatility, investment risk, internal costs and the adverse impact to which the Fund's investment portfolio may be subject.
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 when markets are more challenging.1
- 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 when markets are more challenging.
- 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.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Manager skill
There is no guarantee that a positive investment outcome will be achieved.
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. https://www.ii.co.uk/bonds/monthly-income-bonds#:~:text=With%20investment%20trusts%2C%20up%20to%2015%25-05 April 2023
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 the revenue they generate from their underlying investments*, and they can then use these reserves to maintain consistent dividend pay-outs when markets are more challenging. 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.
*HM Revenue & Customs, IFM14446, 5 July 2019
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).
1,000 stories in every trust
-
To invest in an investment trust you buy shares in the company. You can buy shares via a stockbroker or an online platform. For more information, visit How to invest
-
Yes. Available to all UK resident taxpayers, ISAs or New ISAs (NISAs) allow you to buy and hold investment trusts in an account with favourable tax treatment. The favourable tax treatment of ISAs/NISAs is subject to government legislation and, as such, is subject to change. It is also subject to individual circumstances.
-
Yes, there are fees and charges associated with investing in trusts. These will vary depending on where you invest and whether you seek independent financial advice.
-
Not all investment trusts pay dividends – some are purely focused on capital growth. Whether you receive dividends depends on the underlying performance of the companies in which the trust invests.
Investment trusts cater for different investors with different needs. Dividends are paid regularly, either on a monthly, quarterly, bi-annual, or annual basis – although they don’t all pay at the same time. Investment trusts are listed companies that have a board of directors to make decisions about how the investment is run and how the money is used.
-
Selling an investment trust is as easy as buying one. You can do so at any time via your stockbroker or online platform.
-
Fund managers - or 'portfolio managers', the individuals managing the trust - invest the money on the trust's behalf. They choose the shares and other asset classes to buy, and decide which to sell. They will work to a clear set of rules.
-
The Board of Directors is there to oversee the trust and make sure it is doing what it is supposed to do. They are there to protect investors' interests, hold portfolio managers to account and report to shareholders.
-
Investment trusts have the ability to borrow money which can be used to buy shares or other assets. This is often referred to as 'gearing', and can enhance returns in a rising market, but detract from returns when a market falls. Please remember that if markets fall and the performance of the underlying investments is poor, losses will be made worse.
-
Net Asset Value (NAV) is the value per share of all the investments and other assets owned by the trust. It is calculated by taking away the total liabilities from the total assets and divided by the number of shares in issue.
-
*If the shares are trading at a discount it means the price of a share in the market is less than the trust's Net Asset Value (NAV) per share. When the shares are trading at a premium, the price of a share in the market is higher than the NAV per share.
-
All the information you need will be in the investment trust section of the BlackRock website including reports from your portfolio managers. As a shareholder, you are entitled to attend the Annual General Meeting and receive updates and financial reports from the Board of Directors. You can also visit the websites below for more information. Please be aware that by clicking on these links, BlackRock is not responsible for the content.
