What are investment trusts?

An investment trust is a collective investment. It includes 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 a few unique features.

Investment trusts explained

Originating in the 1860s, investment trusts are the oldest collective investment type. Despite the name, they’re not actually trusts. Instead, they’re companies listed on the Stock Exchange. To deal in them, you buy shares at a price 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. However, investment trusts can also be more volatile. That’s because they can trade at a premium or discount to their net asset value and can use gearing (borrowing money to invest).

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.

How do investment trusts work?

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 (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%. Equally, if it was trading at £1.08 per share, you would be buying it at a ‘premium’ of 8% and 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 always quite that simple. There are several reasons why investment trusts might trade at a 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 were 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. But when they do, it’s usually because of the demand for the expertise of the investment manager. So, 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.

What do investment trusts invest in?

Investment trusts invest in all types of underlying assets using their investors’ funds. But the other big way investment trusts differ from other funds is that they can borrow money to invest. This is known as ‘gearing’.

For example, 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 it pays on the loan, the gearing is good for shareholders. It increases 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.

How to invest in investment trusts

You can hold investment trusts in AJ Bell ISAs, SIPPs and Dealing accounts. To buy an investment trust, you’ll need to open an account if you don’t have one already. It’s easy to search all available investment trusts using our screener tool. You can also order them by price, performance and other benchmarks.

There’s a £5.00 dealing charge when you buy or sell an investment trust online. You can also invest regularly for just £1.50. Our account charge for holding an investment trust is 0.25% a year and you’ll pay an ongoing charge to the investment trust itself. See our charges and rates for more information.

Explore our investment trust offering Use our investment trust screener

Can you invest regularly?

You can invest in many different types of investment trusts regularly for a low-cost monthly dealing charge of £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 – so it’s an easy way to get into the savings habit.

What are the benefits of an investment trust?

There are many advantages of investing in an investment trust, including:

•   Portfolio diversification: Investment trusts offer exposure to many different assets with just one investment.
•   Expert management: Investment management teams 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: You can choose from over 450 investment trusts spanning all major geographical regions and sectors.
•   Traded on the Stock Exchange: Investment trusts trade in exactly the same way as individual company shares, so you can see their price at any time of the day and deal when the market is open.
•   Potentially higher rewards and risks: Investment trusts trade at a discount or premium and use gearing. This means you can potentially amplify your returns but increase any losses, too.