What is an investment trust?

An investment trust is a public limited company that aims to make money by investing in other companies. Owning shares in an investment trust is a way of investing in a variety of different companies. An independent board of directors is elected by shareholders to monitor the performance of the company and look after shareholder interests. The board chooses a professional portfolio manager, such as BlackRock, to manage the company's investments.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

How do investment trusts compare with unit trusts?

The key difference between investment trusts and other financial products such as unit trusts is that they are run as public limited companies. Investment trusts issue a fixed number of shares at launch and are known as closed-ended funds. This allows them to take a long-term view and use gearing which allows greater exposure to stock markets in pursuit of higher returns. In contrast, unit trusts are open-ended funds and continue to issue new units in response to demand. Please remember that Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Unit Trusts

  • Open-end investment vehicles with no fixed number of shares/units available
  • As more people invest, more units are created
  • Able to distribute income on a pre-determined basis and unable to hold back cash to distribute in leaner years1
  • Pooled investment vehicles
  • Diversified portfolios
  • Run by investment professionals

Investment Trusts

  • Closed-end investment vehicles with a fixed number of shares available2
  • Independent board of directors
  • Can borrow money to invest i.e. gearing
  • Can retain up to 15% of any income earned and distribute cash in leaner years3
  • Can trade at a premium or discount to the value of their underlying investments
  • Flexibility to invest in assets which trade less easily and frequently

1Income is not guaranteed and the amount can vary depending on the value of the underlying investments
2New share issuance is strictly controlled by the board and approved by shareholders
3There is no guarantee that income will be paid

What can investment trusts offer?

Easy access

There are more ways than ever to invest in an investment trust. Alongside traditional routes via stockbrokers, savings schemes and ISAs, fund supermarkets and platforms also offer a range of investment trusts.

Simplicity

Investment trusts are no more complicated for clients to understand than a unit trust, they give investors access to a wide range of investments which may be too complicated or costly to manage as a directly held portfolio.

Income potential

Finding reliable sources of income is becoming harder for investors. Investment trusts can retain as much as 15% of their revenue meaning they can maintain consistent pay-outs through using reserves even in challenging markets. However, not all investment trusts are able to build up reserves and even where there is surplus income it may not be enough to last sustained periods of poor market performance.

Gearing

Investment trusts can borrow in a variety of ways and at favourable rates of interest. The use of gearing allows clients to benefit from additional exposure in rising markets but investments may be hit harder when stock prices fall.

Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Accountability

As shareholders, investors in trusts are able to hold the company to account and vote at AGMS.

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  • To invest in an investment trust you buy shares in the company. You can buy shares via a stockbroker or an online platform. For more information, visit How to invest

  • Yes. Available to all UK resident taxpayers, ISAs or New ISAs (NISAs) allow you to buy and hold investment trusts in an account with favourable tax treatment.

    The favourable tax treatment of ISAs/NISAs is subject to government legislation and, as such, is subject to change. It is also subject to individual circumstances.

  • Yes, there are fees and charges associated with investing in trusts. These will vary depending on where you invest and whether you seek independent financial advice.

  • Whether you receive dividends depends on the underlying performance of the companies in which the trust invests. Investment trusts cater for different investors with different needs. Some trusts offer income for those that need it and may pay out dividends depending on the underlying income received from its investments.

  • Selling an investment trust is as easy as buying one. You can do so at any time via your stockbroker or online platform.

  • Fund managers - or 'portfolio managers', the individuals managing the trust - invest the money on the trust's behalf. They choose the shares and other asset classes to buy, and decide which to sell. They will work to a clear set of rules.

  • The Board of Directors is there to oversee the trust and make sure it is doing what it is supposed to do. They are there to protect investors' interests, hold managers to account and report to shareholders.

  • Investment trusts have the ability to borrow money which can be used to buy shares or other assets. This is often referred to as 'gearing', and can enhance returns in a rising market, but detract from returns when a market falls. Please remember that if markets fall and the performance of the underlying investments is poor, losses will be made worse.

  • Net Asset Value (NAV) is the value per share of all the investments and other assets owned by the trust. It is calculated by taking away the total liabilities from the total assets and divided by the number of shares in issue.

  • If the shares are trading at a discount it means the price of a share in the market is less than the trust's Net Asset Value (NAV) per share. When the shares are trading at a premium, the price of a share in the market is higher than the NAV per share.

  • Capital is at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

    Each investment trust has its own investment objective and the level and type of risks vary depending on what assets the trust invests in and where it invests.

    The use of gearing means the manager is taking on more risk. If the investment trust borrows and the investments perform well, the overall performance will reflect this but if the performance of the underlying investments is poor, losses will be made worse. Investment trusts can also be volatile meaning investors need to be able to weather market ups and downs over the long term.

     

  • All the information you need will be in the investment trust section of the BlackRock website including reports from your portfolio managers. As a shareholder, you are entitled to attend the Annual General Meeting and receive updates and financial reports from the Board of Directors. You can also visit the websites below for more information. Please be aware that by clicking on these links, BlackRock is not responsible for the content.

    The AIC – Guide to Investment Companies
    Morningstar
    TrustNet

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