8 things you need to know about investment trusts


At heart, an investment trust is just another collective fund, like a unit trust or an OEIC, which bundles together the savings of various different investors and sticks them in the stock market. However, they also come with a few bells and whistles that it's useful to know about. Don't worry if you some of the lingo is unfamiliar - we've added a jargon buster at the bottom of the page.

  1. They tend to give better returns than other collective funds. The data is complex and difficult to navigate but was done by some very clever people at CASS Business School - one of the top UK business schools - so we’re inclined to trust it. Investment trusts tend to allow fund managers more freedom, and this came out as a distinct advantage.

  2. Certain types of investment are largely or exclusively available through investment trusts. These include heavy-duty assets that can’t readily be bought and sold such as infrastructure, wind farms, private equity, even timber. Investment trusts tend to be a better vehicle for managing this type of asset because the pool of money is ‘closed’ and the managers don’t have to sell assets to meet redemptions from the fund.

  3. The price of the investment trust does not always reflect the price of the underlying assets. Trusts trade on the stock exchange and operate like a normal share. In practice this means that the trust may hold £1000 of BP shares and £1000 of Vodafone shares, but it won’t necessarily trade at £2000. It may be that the trust’s price is just £1,800. This ‘discount’ to ‘net asset value’ means investors can pick up £2000-worth of assets for £1800. It does occasionally work in reverse with a fund trading at a premium.

  4. They go back a looooooong way. The F&C Investment trust has just celebrated its 150th anniversary. These are the granddaddies of the investment world. That says something for the durability of the structure.

  5. You don’t have to invest very much to get involved. Entry levels starts at around £25 per month, or even £50 per quarter. You can get them super-cheaply from the fund managers themselves – try Witan or Baillie Gifford or Aberdeen. You can also get them via platforms, but be warned, some charge per transaction for investment trusts meaning regular saving becomes very expensive.

  6. Investments trusts have a board that should, in theory, look after your interests. Board responsibilities include picking the right investment manager, keeping that investment manager on track and keeping fee levels down. Some do a great job. Others, not so much.

  7. Some are almost as cheap as passive funds. Some of the major trusts are cheap as chips. City of London Investment trust, for example, has an ongoing charge of 0.4%, the Scottish Mortgage investment trust (run by Baillie Gifford) of just 0.48%.

  8. They’re good if you like an income. Investment trusts can reserve up to 15% of the income they receive from the investments they hold (interest and dividends, for example), storing it up in the good times to pay it out in the bad times. This can help give investors a more reliable dividend stream over time. Some trusts have astonishing track records of paying out dividends. The AIC (Association of Investment Companies) currently lists 22 trusts with a track record of year-on-year dividend increases over a decade or more.

There. Now you can chat investment trusts like a pro.


The boring jargon buster

  • Unit trust: this is a collective fund, formed to manage a portfolio of stock market investments. Investors buy ‘units’, and there is no limit how many people can invest in it or how much can be invested.
  • OEIC (Open Ended Investment Company): a slightly updated version of a unit trust, run on the same lines.
  • Collective funds: these bundle together the savings of various different investors and put them in the stock market.
  • Redemptions: when investors sell out of a fund.
  • Dividends: a portion of a company's profits paid to shareholders annually, semi-annually, quarterly or monthly
  • Passive fund: a fund that aims to track an index, rather than having a fund manager select shares.
  • Net asset value: the aggregate value of the investments held within a fund.


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