Investment Trusts

Investment trusts are pooled funds structured as companies that exist to make money. Their only business is to buy and sell shares in other companies.

What is an investment trust?

Investors in an investment trust company become a shareholder of that company. The structure is different to that of a Unit Trust or OEIC but fundamentally the different types of investments work in a similar way.

Investment Trusts spread risk by pooling money with that of other investors / shareholders using it to buy shares in other companies.

The buying and selling of the shares works in a similar way to any other share as does the tax position.
Investment trusts can invest in companies listed on either the UK or overseas stock markets.

Investment trust shares have an additional risk feature when compared to a unit trust or OEIC in that the shares can trade at a ‘discount’ or ‘premium’ to its net asset value. This essentially means that the share price may or may not reflect the actual value of the assets held within the company;

Discounts and Premiums

The value of the shares of an Investment Trust are affected by both the value of the shares owned by the trust in other companies and by the level of demand for shares in the investment trust itself. Shares in a well managed trust are likely to be subject to higher demand which will increase the share price.

If the value of the assets falls below the total value of all the trust’s shares, the trust is said to be trading at a premium. If the value of the assets rises above the total value of all the trust’s shares, the trust is said to be trading at a discount.

If you buy when shares are at a discount, the discount could narrow, increasing your returns, or grow, eroding your returns. If you buy at a premium, it could narrow, reducing your returns or grow, increasing your returns.

Discounts and premiums therefore provide an added level of risk for investors, which can of course work well, but also can compound losses in falling markets, therefore these investment structures are generally more appropriate to more sophisticated investors.

Contact us to discuss structuring an appropriate investment trust portfolio.