For first-time investors in trusts, here is an overview of investment trusts – what they are and how they invest.
What is an investment trust? Investment trusts, also known as investment companies, are a type of collective investment fund. All types of fund pool the money of a large number of different investors and delegate the investment of their pooled assets, typically to a professional fund manager. The idea is that this enables shareholders in the trust to spread their risks and benefit from the professional skills and economies of scale available to an investment management firm. Funds are able to buy and sell investments without paying tax on realised gains.
Collective funds have been a simple and popular way for individual investors to invest their savings for many years, and investment trusts have shared in that success. Today, more than £250bn of savers’ assets are invested in investment trusts. The first investment trust was launched as long ago as 1868, so the sector has a long history. Sales of open-ended funds (unit trusts, OEICs and UCITs funds) have grown faster, but investment trust performance has generally been superior.
How do they differ from unit trusts and open-ended funds?
There are several differences. The most important ones are that shares in investment companies are traded on a stock exchange and are overseen by an independent board of directors, like any other listed company. Shareholders have the right to vote at annual general meetings (AGMs) on a range of things, including the election of directors, changes in investment policy and share issuance. Trusts can also, unlike most open-ended funds, borrow money in order to enhance returns. Whereas the number of units in a unit trust rises and falls from day to day in response to supply and demand, an investment trust is able to deploy permanent capital.
What are discounts?
Because shares in investment trusts are traded on a stock exchange, the share price will fluctuate from day to day in response to supply and demand. Sometimes the shares will change hands for less than the net asset value (NAV) per share of the company. At other times, they will change hands for more than the NAV per share.
The difference between the share price and the NAV per share is calculated as a percentage of the NAV and is called a discount if the share price is below the equivalent NAV and a premium if it is above the NAV.
What is gearing?
In investment, gearing refers to the ability of an investor to borrow money in an attempt to enhance the returns that flow from his or her investment decisions. If investments rise more rapidly than the cost of borrowing, this has the effect of producing higher returns. The reverse is also true, meaning that gains and losses are magnified. Investment trusts typically borrow around 5–10% of their assets, although this figure varies widely from one trust to another.
What are the main advantages of investing in an investment trust?
Because the capital is largely fixed, the managers of an investment trust can buy and sell the trust’s investments whenever they need, rather than having to buy and sell simply because money is flowing in or out of the fund, as unit trust managers are required to do. The ability to gear, or use borrowed money, can also potentially produce better returns. The fact that the board of an investment trust is directly accountable to the shareholders is important. So too is the ability of boards to smooth the payment of dividend income by putting aside surplus revenue as reserves.
Because their capital base is permanent, investment companies are free to invest in a much wider range of investments than other types of funds. In fact, they can invest in almost anything. Although many of the largest trusts invest in listed stocks and bonds, the biggest growth in recent years has been in a range of more specialist
areas, such as renewable energy, infrastructure, debt securities, and private equity. Investment trusts offer fund investors a broader choice and greater scope for diversification, in other words.
And what are the disadvantages?
The two main disadvantages are share price volatility and potential loss of liquidity. Because investment trusts can trade at a discount to the value of their assets, an investor who sells at the wrong moment may not receive the full asset value for their shares at that point. The day-to-day value of the investment will also fluctuate more than an equivalent open-ended fund. In the case of more specialist trusts, it may not always be possible to buy or sell shares in a trust at a good price because of a lack of liquidity in the market. Investors need to make sure they understand these features before investing.
How many trusts are there?
According to the industry trade body, the Association of Investment Companies, there were just over 300 investment trusts with more than £260bn in assets (as at the end of November 2025). They are split between a number of different sectors, reflecting the regions or types of investments in which they invest. Scottish Mortgage, the largest trust, has approximately £15bn in assets.
What are alternative assets?
While investment trusts have traditionally invested primarily in publicly listed stocks and shares, whose values are known every day, the last decade has seen significant growth in so-called alternative assets. These are trusts which invest in longer-term assets, which are mostly not traded daily and therefore can be valued only at less frequent intervals. Examples include commercial property, renewable energy, infrastructure and private equity. Many of these alternative trusts are popular because of their ability to pay higher levels of income.
How are they regulated?
All investment companies are regulated by the Financial Conduct Authority. So too are the managers the board appoints to manage the trust’s investments. Investment trusts are also subject to the Listing Rules of the stock exchange on which they are listed. The board of directors is accountable to shareholders and regulators for the performance of the trust and the appointment of the manager, and is legally bound by the requirements of successive Companies Acts.
How do I invest in an investment trust?
There are a number of different ways. You can buy them directly through a stockbroker or via an online platform. A few larger investment trusts also have monthly savings schemes where you can transfer a fixed sum every month to the company, which then invests it into its shares on your behalf. If you have a financial adviser or a portfolio manager, they can arrange the investment for you.
What do investment trusts cost?
As with any share, investors in investment trusts will need to pay brokerage commission when buying or selling shares in an investment trust, and also stamp duty on purchases. The managers appointed by the trust’s directors to make its investments charge an annual management fee which is paid automatically, together with dealing and administration costs, out of the trust’s assets. These management fees typically range from as little as 0.3% to 2.0% or more of the trust’s assets.
What are tax wrappers?
Tax wrappers are schemes which allow individual investors, if they comply with the rules set by the government, to avoid tax on part or all of their investments. The two most important tax wrappers are the Individual Savings Account (ISA) and the Self-Invested Personal Pension (SIPP). The majority of investment trusts can be held in an ISA or SIPP. There are annual limits on the amounts that can be invested each year (currently £20,000 for an ISA). Venture capital trusts (VCTs) are a specialist type of investment trust which have a number of tax advantages, reflecting their higher risk. VCTs invest in start-ups and early-stage businesses.
Who owns investment trusts?
Twenty-five years ago, life insurance companies were the biggest investors in investment trusts, which they used to manage their client funds and pensions. These days, such institutional investors mostly manage their own investments directly. Other than some specialist types of trust, the largest investors in trusts today are wealth management firms (formerly stockbroking firms), other types of intermediaries and, increasingly, private investors. The growing number of individual investors reflects the growing influence of online platforms, which give individual investors the ability to choose their own investments for ISAs, SIPPs and taxable share/fund accounts.
Are they difficult to understand?
Investment trusts are a little more complex than a simple open-ended fund, but no more difficult to understand than most types of listed companies. It is important to understand the concept of discounts and premiums before you start to invest, but buying, selling and following the fortunes of your investment could not be easier. If you like the idea of making the connoisseur’s choice when investing, you will find the effort of understanding investment trusts worthwhile.