An investment trust is a corporation that sells a certain number of shares on a stock market to investors and then pools the funds to invest on their behalf. Many investors consider investment trusts to be a secret weapon because of their unique characteristics.
Closed-ended funds, also known as investment trusts, are sometimes said to as “the city’s best-kept secret.” Despite this, they are sometimes overshadowed by the open-ended investment companies (OEICs) and unit trusts that they consistently outperform.
What is an investment trust?
Investment trusts are publicly traded organisations that offer shares to investors and then combine the funds to make carefully chosen investments in bonds, property, stocks, and other assets on behalf of its shareholders.
How investment trusts work
Investment trusts are governed by an independent board of directors elected to serve the interests of its shareholders. It is their responsibility to establish policies and engage a fund manager from an asset management business who will be in charge of selecting the finest investments and ensuring that shareholders receive a good return on their investment.
Read More: How to Invest In Real Estate
Each trust, like other collective investments, has a defined mission or goal. The Association of Investment Companies (AIC), the industry’s trade association, divides trust into sectors depending on the location, industry, or investment type they pursue.
Some have a broad mandate, focusing on all firms throughout the world with the highest potential for value growth. Others, such as domestic dividend payers, small businesses, healthcare, real estate, or ethical and sustainable projects, are more narrow and have a more focused scope.
The sort of investment made by a trust and how it is pursued are crucial factors in deciding how hazardous the investment is.
How do investment trusts differ from funds?
Investment trusts have existed since the Victorian era and are highly respected by financial experts. However, despite a superb long-term track record and high recommendations from industry insiders, they have yet to break into the mainstream.
The fact that there are fewer than 400 investment trusts compared to the hundreds of funds available, such as unit trusts and OEICs, is part of the reason they are disregarded. Trusts are also known for being complicated and difficult to comprehend.
Four features that make investment trusts stand out:
- Fixed supply of shares
Because there are only a limited number of shares in circulation, you can only invest when the trust is first established or when someone wants to sell. This closed-ended approach allows trust managers to pursue their goals without feeling obligated to make fresh assets when new money comes in or to sell them when investors opt to leave.
- Freedom to borrow
Gearing is when a trust borrows money to purchase larger shares in investments. This method may be both profitable and risky since it magnifies gains when an investment performs well while highlighting losses when it performs poorly.
- Ability to trade at a discount and at a premium
Because investment trusts are traded on a stock market, the price of their shares is determined by supply and demand rather than the actual worth of their combined holdings, which is known as net asset value (NAV).
The investment price might be undervalued or overpriced since it is dependent on what investors believe it is worth rather than the NAV. An investment trust is undervalued if there is no demand, and it will sell for less than its NAV, which is known as trading at a discount. When a trust is in great demand, it is overpriced, and its trade price might climb above its net asset value (NAV), which is known as trading at a premium.
- Regular cash flow for investors
Investment trusts can keep up to 15% of the revenue earned from their assets to pay out as dividends to investors at a later period, such as when returns are low. Open-ended funds, on the other hand, return all income to investors, but this unusual technique does not. It also implies that, regardless of what happens in the economy or in corporate boardrooms, investors should always get a steady or continuously growing income. This is a popular feature among dividend-paying investors.
How to Invest in Investment Trusts?
You can acquire shares in an investment trust either directly from the trust or through a broker or investing platform on the secondary market.
You’ll need to acquire them from a newly created investment trust if you want to buy them straight from the trust.
To purchase them on the secondary market, you’ll need to locate willing vendors, which is usually not difficult. All you’ll need is a broker, or an investing platform that can function as one. These online fund supermarkets provide reasonable prices, a large selection, and the possibility to invest tax-free by acquiring shares through an Individual Savings Account (ISA).
Typically, you’ll have to pay platforms for any transactions you do, as well as a fee to keep your money with them — the AIC has put up a handy table to compare these fees.
How to choose an investment trust?
Begin by determining which investment trust best meets your requirements. Establish your objectives, think about the industry you want to invest in, and go through the options on the AIC website.
It’s time to create a shortlist once you’ve cut down your criteria. Track records, if the trust is selling at a reasonable price, whether you wish to employ gearing, and any related costs are all important considerations.
In addition to platform fees and any external expenses, you will pay the trust a yearly recurring charge. This is deducted from your investment as a percentage and is used to cover the company’s day-to-day expenses.
The key for investors is to decide if the charges are appropriate in light of the trust’s duties, and whether the predicted returns, after fees, are high enough to leave you with more money than you would have made otherwise.