Investment Trusts

Investment trusts are a type of collective investment. They are structured as companies and exist purely to invest in a portfolio of shares and securities in other companies to make money for their own shareholders.

They pool investors’ money and employ a professional fund manager to invest in the shares of a wider range of companies than most people could practically invest in themselves. This way, even people with small amounts of money can gain exposure to a diversified and professionally run portfolio of shares, spreading the risk of stock market investment.

Investment trusts are what is known as closed-ended funds. This means that the amount of money which the trust raises to invest is fixed at the start by issuing a set number of shares to investing shareholders. Every selling shareholder must first be matched to a potential buyer via the stock market before a transaction can take place. Having a fixed pool of money enables the fund manager to plan ahead.

Investment Trusts can be set up in various ways:


To invest in particular sectors and types of company, e.g. communications companies or alternative energy producers.


To invest in set geographical areas, e.g. entirely UK-based companies or those from different parts of the world.


To have specific aims for their shareholders, e.g. some try to maximise income, others aim exclusively for capital growth over the long-term, whilst others aim to provide a combination of income and capital growth.


To issue different share classes to meet different investors' needs, i.e. some aim to pay regular dividends for investors who want an income whilst others aim to pay out only a capital amount at the end of the trust's life.

All trusts have investment objectives that will be clearly stated in their literature.

Investment trusts can borrow to purchase additional investments. This is called ‘financial gearing’. It allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to pay the interest on the loan, repay it and then make a profit on top of that. Obviously, the more a trust borrows, the higher risk it’s taking – but the greater the potential returns.

Financial gearing works by magnifying the investment trust’s performance. If a trust ‘gears up’ and markets rise, the returns outstrip the costs of borrowing so the return to the investor will be even greater. However, if markets fall and performance of the assets in the portfolio is poor, losses suffered by the investor will be increased due to the costs of borrowing.

When investment trusts gear up, they can usually borrow at much lower rates of interest than individuals or other kinds of companies. This is because the borrowings are secured on the trust’s portfolio, making the trust a good credit risk.

To be eligible to invest in an investment trust, an investor can be either an individual (if 18 years of age or older), a company or a trustee. The minimum monthly contribution is normally £100 and the minimum lump sum £500-£1,000, whilst there is no maximum limit. Most investment trusts allow shares to be sold at any time, either completely or partially.


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