Understanding investment trusts
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.
Capital as risk. Marketing Material.
Pull up a chair, grab a cup of coffee, and get comfortable as we dive into the world of INVESTMENT TRUSTS.
Imagine you're embarking on a journey to build an investment portfolio. You want to explore various opportunities, but navigating that vast landscape of investment options can be overwhelming. What if there was a way to simplify this process and have a team of experts manage a range of investments for you? Well, that's where Investment Trusts come in.
Imagine you're embarking on a journey to build a diversified investment portfolio. You want to explore various opportunities, but navigating the vast landscape of investment options can be overwhelming. What if there was a way to simplify this process and have a team of experts manage a range of investments for you? Well, that's where Investment Trusts come in. So, pull up a chair, grab a cup of coffee, and get comfortable as we dive into the world of INVESTMENT TRUSTS.
First things first, what exactly is an Investment Trust? An Investment Trust is a public limited company that aims to make money by investing in other companies or assets. It is a type of collective investment fund, so think of it as a basket of investments, managed by professionals and overseen by an Independent Board. By owning shares in an Investment Trust, an investor is able to invest in a variety of companies.
So, what makes Investment Trusts unique when compared to other investment options? One. They’re Professionally Managed. Investment Trusts are managed by experienced fund managers who make decisions on behalf of shareholders (that’s the likes of you and me). Two. They’re listed on a Stock Exchange. Investment Trusts’ shares are listed on the London stock exchange, where investors can buy and sell their shares through an investment platform. Three. they have a closed-ended Structure. Investment trusts have fixed share capital at launch, and their shares trade on the stock exchange; this means that investors can buy and sell their shares intra-day and the fund manager is not forced to sell underlying investments to fund redemptions in the same way an open-ended fund is. The manager therefore has the ability to invest for a longer time horizon and it mitigates the need for the manager to sell down assets at points in the investment cycle that might not be opportune. Four. they have revenue Reserves. Investment Trusts have the ability to retain some of the income generated by their assets. And this helps them to maintain steady dividend payments to investors. Oh, by the way, a dividend is a portion of a company's earnings that is paid to its shareholders as a reward for their investment. They can be paid in cash or reinvested back into the stock. During a recession for example, when many companies cut dividends, Trusts can use their reserves to keep or even increase their dividends payments. And this can be attractive to investors who depend on the income from their investments.
Investment Trusts come in various flavours, each aiming to cater to different investment goals. And can invest in different asset classes or themes, be it equities, debt and alternatives such as infrastructure, renewables, property.
An independent board of directors is elected by shareholders to oversee the good governance of the Company and look after shareholder interests. The directors meet several times a year and review the trust's performance. They also answer to the shareholders, meaning investors have a say in how the trust is run. This allows shareholders to vote on issues at the Trust’s Annual General Meetings or AGMs as they like to be called, or vote in new directors if dissatisfied with the current ones, for example. The board also chooses a professional portfolio manager to manage the company's investments. So, the board of directors plays a really crucial role in an Investment Trust!
Investment Trusts can trade at a premium or a discount to their NAV. Before I explain what that means, I should explain what NAV is.
NAV, or Net Asset Value per share, is the total value of the trust's assets minus its liabilities (these are financial obligations or debts that the trust owes), divided by the number of shares. Okay, now back to premiums and discounts. Let’s say an investor buys and sells shares at the listed share price. If the share price is higher than the NAV per share, the investment trust is trading at a premium. This means there is strong demand for the shares. If the share price is lower than the NAV per share, the investment trust is trading at a discount. This means there is less demand for the shares, with more shareholders wishing to sell their shares than there are buyers.
Fluctuations in the level of premium or discount are driven by the supply and demand for the trust's shares which can be influenced by a range of factors, including market sentiment, and the performance of the underlying assets. It might seem that if shares are trading at a discount, this is a bad thing, but that is not necessarily the case. The share price might have fallen because of wider negative market sentiment for example when COVID-19 first broke.
A portfolio trading at a discount might even represent a bargain opportunity to buy very cheaply.
Turning to premiums, investment trusts trading at a premium are in high demand. This can be because of strong performance or positive market sentiment. However, investors buying into a premium-rated investment trust have to pay a share price that is higher than the value of the underlying assets in the portfolio. Investment trusts trading on a premium carry the risk of sliding to a discount if demand for the shares falls.
Gearing is a term you'll often hear when discussing Investment Trusts. As a listed company, Investment Trusts can borrow money from banks so that they can invest more in potential opportunities or investments. The idea is simple: the borrowed money is invested aiming to earn additional returns in excess of the interest due on the loan. If successful, the more the trust borrows, the more profit it makes. However, if the investment fails, the more it borrows, the more it loses. Therefore, the more an Investment Trust borrows, the riskier it becomes. While gearing can help amplify gains, it can also increase losses. It's a double-edged sword that needs to be managed carefully.
There are more ways than ever for investors to invest in an Investment Trust. Alongside traditional routes via stockbrokers, ISAs and Private Pensions, fund supermarkets and platforms can also offer a range of Investment Trusts.
It wouldn’t be an episode of BlackRock Basics without a wrap up!
One. Investment Trusts can offer unique advantages to investors due to their closed-ended structure, which allows fund managers to focus on long-term investments without the pressure of investor redemptions. Two. An investment trust’s ability to use gearing can also potentially enhance returns, although it also increases risk. Three. The premium/discount mechanic can provide opportunities for investors to buy shares at a discount to their NAV, potentially increasing their returns. Four. Investment Trusts have the ability to retain a revenue reserve which can help maintain dividend payments in difficult times. And finally, five. The fact that they are professionally managed and overseen by an independent board. For some investors, this adds an extra level of oversight and accountability providing them with more confidence that their interests are being protected and that the trust is being managed effectively. However, it's important to note that investment trusts come with risks such as market fluctuations, liquidity issues, and the potential for trading at a discount to NAV, which can impact the value of your investment. Overall, it is imperative that you do your homework, including reading fund documentations to understand the risks before investing.
Risk Warnings
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.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Important Information
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Investment Trusts explained
BlackRock has been managing investment trusts for over 30 years. Discover what makes them unique, and how they can be a smart addition to your investment portfolio with Charlie Kilner, director at BlackRock.
What is an investment trust?
Investment trusts are one of the UK’s most enduring investment options. They are structured as public limited companies that aim to make money by investing in other companies. Like other collective funds, investment trusts aim to grow an investor’s capital by investing in a carefully-curated selection of companies within a single portfolio. Investment trusts are traded on an exchange in the same way as a normal share.
An independent board of directors provides independent oversight, monitoring the performance of the company and looking after shareholder interests. The board chooses a professional portfolio manager, such as BlackRock, to manage the company's investments in line with shareholder interests and goals.
How big is the investment trust sector?
Investment trusts have stood the test of time. The first investment trust launched over 150 years ago, and the sector now has over 300 trusts and £272bn in assets.1 Their longevity is a tribute to the returns they have delivered for investors over the years, and their ongoing relevance as a home for long-term investing.
How do investment trusts differ from other investments?
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Investment trusts are managed by experienced fund managers, carefully selected by the board. The closed-ended investment trust structure affords significant investment flexibility, allowing fund managers to focus on long-term investments without the pressure of managing inflows and outflows. This means they are well-suited for active investment management.
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Investment Trusts’ shares are listed on the London stock exchange, where investors can buy and sell their shares through an investment platform.
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Investment trusts have fixed share capital at launch. This means the manager has a fixed pool of capital rather than having to buy and sell shares to fund redemptions, as happens with an open-ended fund.
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Investment trusts have the ability to retain some of the income generated by the assets they hold, including dividends and interest. They can build up these reserves to pay out income in more difficult environments, creating a smoother income return for investors.
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The directors are elected by shareholders to oversee the good governance of the company and look after shareholder interests. The directors answer to the shareholders, giving investors a vital say in how the trust is run. Shareholders can vote on board members and make their voices heard. This adds an extra level of oversight and accountability.
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When trusts are trading at a discount, it can provide opportunities for investors to buy shares at a discount to the value of their underlying assets, potentially increasing their returns.
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Investment trusts can borrow money to invest more in potential opportunities or investments. The aim is to earn additional returns in excess of the interest due on the loan. If successful, the more the trust borrows, the more profit it makes. However, if the investment fails, the more it borrows, the more it loses.
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It's important to note that investment trusts come with risks such as market fluctuations, liquidity issues, and the potential that they will trade at a discount to the value of the underlying assets.
Who are Investment Trusts for?
Investment trusts have lots of different uses. They can be used for long-term capital growth, or to generate an income, or for a combination of both. They are a natural choice for children’s savings because they tend to be long-term investments. They can also be useful for people in retirement, who are looking to generate an income from their investments that grows in line with inflation. In both cases, the unique structure of investment trusts is important. You need to pick the right choice for you – some trusts focus on capital growth, such as smaller companies, while others, such as commodities, have a more total return approach.
What do investment trusts invest in?
Investment trusts come in various flavours, each catering to different investment goals. This includes income generation, from dividend-paying companies, capital growth from areas such as smaller companies, or a combination of both, which may be a feature of areas such as commodities. They invest across a range of regions, asset classes and themes, including equities, bonds and alternatives such as infrastructure, renewables, or property. They offer lots of options for portfolio diversification, investing in smaller companies, or emerging markets, alongside large mainstream markets such as the UK, Europe or the US.
How do investment trusts compare with unit trusts?
Investment trusts are run as public limited companies, issuing a fixed number of shares at launch. This is a ‘closed-ended’ structure. In contrast, unit trusts are ‘open-ended’. This means they need to buy more assets when there are inflows and sell holdings when there are outflows. For open-ended funds, the price will always reflect the value of the underlying assets, whereas investment trust pricing will reflect demand and supply for their shares in the market.
Unit trusts versus investment trusts
Unit trusts
- Open-end investment vehicles with no fixed number of shares/units available
- As more people invest, more units are created
- Income generated by underlying investments is distributed in full
- Pooled investment vehicles
- Diversified portfolios
- Run by investment professionals
Investment Trusts
- Closed-end investment vehicles with a fixed number of shares available
- Independent board of directors
- Can borrow money to invest i.e. gearing
- Can retain up to 15% of any income earned and distribute cash when markets are more challenging.
- 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
How do investment trusts compare with exchange traded funds?
Investment trusts and exchange-traded funds are traded on an exchange. However, they are different in the way they are managed. ETFs are passive funds, usually replicating an index, such as the FTSE 100 or S&P 500, whereas investment trusts are usually active funds, run by a designated fund manager with the aim of beating a benchmark. ETFs are ‘open-ended’, meaning shares are created or redeemed based on investor demand.
ETFs
- ETFs can issue or redeem shares based on investor demand.
- ETFs tend to trade at or near their net asset value
- ETFs often have higher liquidity and may be available at very low cost
- Predominately a passive investment option, designed to replicate the performance of an index.
- Pooled investment vehicles
- Diversified portfolios
- Traded on an exchange
Investment trusts
- Closed-end investment vehicles with a fixed number of shares available
- Independent board of directors
- Can borrow money to invest i.e. gearing
- Can retain up to 15% of any income earned and distribute cash when markets are more challenging.2
- Can trade at a premium or discount to the value of their underlying investments*
- Active management across a broad range of asset classes
Why choose investment trusts?
Investment trusts bring together a diverse range of opportunities within a single structure. There is a breadth of options for investors to choose from, depending on their long-term goals.
Easy access
Alongside traditional routes via stockbrokers, savings schemes and ISA's, fund supermarkets and platforms also offer a range of investment trusts.
Simplicity
Investment trusts 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
Many investment trusts have a strong track record of delivering high and/or growing payouts to investors over time, helping their income keep pace with inflation. The Association of Investment Companies (AIC) maintains an annual list of ‘dividend heroes’ – those investment trusts that have consistently increased their dividend for more than 20 years. It also has ‘next generation’ heroes, those trusts that have increased their dividends for at least ten years, but less than 20.
Maximising income and long term growth
An income and growth strategy can deliver both regular rewards and capital growth to your investments. But navigating the nuances of dividends, compounding and market dynamics requires deep understanding and an educated approach to successfully steer your decision-making.
Growth Opportunities
There’s a world of dynamic investment opportunities. Global equity markets serve as a gateway for robust growth, connecting capital with the most promising long-term ideas. Our comprehensive insights are designed to enhance your portfolio’s growth potential.
Your Path to Building Wealth
We’re here to help guide you through your path to wealth building. Discover how our variety of investment trusts can help you reach your financial goals no matter where you are in your life’s journey. Step by step, let's embark on this journey to prosperity together.
Investing for retirement
Retirement should be a time of fun and adventure, setting behind the cares of working life. It’s become harder to retire in comfort, as life expectancy increases, and governments and companies reduce their contributions. Nevertheless, with forward planning, and careful saving, a prosperous retirement is within reach.
Source:
1 The AIC - Our sector - 31 October 2025
2 Worldometers - How many Countries in Europe? - October 2025
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
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.
