Investment trusts are one of the oldest types of pooled investment available to UK investors, yet they're often overlooked in favour of open-ended funds and index trackers. They work differently under the bonnet, which creates both extra opportunities and extra risks worth understanding before you buy.
What is an investment trust?
An investment trust is a public limited company that exists to invest in a portfolio of assets — shares, bonds, property or other investments — on behalf of its shareholders. Because it's a company listed on the stock exchange, you buy and sell shares in the trust itself, just as you would shares in any other listed company, rather than buying units directly from a fund manager.
How this differs from a unit trust or index fund
| Feature | Investment trust | Unit trust / OEIC / index fund |
|---|---|---|
| Structure | Closed-ended (fixed number of shares) | Open-ended (units created/cancelled on demand) |
| Price vs. assets | Can trade at a premium or discount to net asset value | Priced exactly at net asset value |
| Borrowing (gearing) | Can borrow to invest further | Generally cannot |
| Trading | Bought and sold like a share, during market hours | Priced once a day (usually) |
Discounts and premiums to net asset value
Because an investment trust's share price is set by supply and demand on the stock market, it can drift away from the actual value of the assets it holds — known as its net asset value (NAV). If the share price is below the NAV, the trust trades at a "discount"; if above, a "premium".
A discount can mean you're effectively buying the underlying assets for less than they're worth — but it can also persist or widen, and isn't automatically a bargain. Some trusts habitually trade at a discount due to unpopular sectors, high charges or poor sentiment, and that discount can remain wide indefinitely.
Gearing: borrowing to invest
Many investment trusts can borrow money to invest on top of shareholders' capital — known as gearing. This amplifies returns in both directions: if the underlying investments rise, gearing increases the gain for shareholders; if they fall, gearing increases the loss. A trust with 10% gearing effectively has £110 invested for every £100 of shareholder money, borrowing the extra £10.
Why some long-term investors favour trusts
- Revenue reserves. Because they're closed-ended, investment trusts can hold back some income in good years and use those reserves to smooth dividend payments in weaker years — some trusts have raised their dividend every year for decades as a result.
- No forced selling. An open-ended fund may need to sell assets when investors redeem units in large numbers; a closed-ended trust doesn't face this pressure, which can suit less liquid assets like property or infrastructure.
- Access to specialist or illiquid sectors — private equity, infrastructure and some property strategies are more commonly available via investment trusts than open-ended funds.
Common mistakes
- Assuming a discount always means "cheap". Check why the discount exists before treating it as an opportunity.
- Ignoring gearing when comparing volatility between a trust and a similar index fund — a geared trust will usually swing more sharply in both directions.
- Overlooking ongoing charges, which for actively managed trusts are often higher than a comparable index tracker, even before performance fees some trusts still charge.
What to do next
Before buying an investment trust, check its current discount or premium to NAV, its gearing level, its ongoing charges figure and its dividend track record if income matters to you, and compare these against a simple index fund covering the same market to judge whether the trust's structure genuinely adds something for your goals.