What are they?
Investment trusts (ITs) are public limited companies (PLC) that invest in other companies and consist of diversified portfolios that are professionally managed. They follow a wide variety of investment policies, usually specialising in a type of investment or particular geographic region. The money raised is invested by the trust and if the underlying investments do well the share price of the investment trust rises.
The number of shares in issue is normally fixed and the price varies according to market demand.
How do they work?
Investment trust shares can be purchased through a wide variety of stockbroker services or through online share dealing accounts. Once purchased, investors’ money is pooled together from the sale of a fixed number of shares which a trust issues when it launches.
What are the benefits?
ITs are similar to funds such as open ended investment companies (OEICs) and unit trusts, as they provide a ready-made portfolio of investments managed by an expert investment team. Unlike unit trusts and OEICs, Investment Trusts have a fixed number of shares in issue. This means they do not have money flowing in and out unpredictably, which helps fund managers to plan ahead, in-line with accurate forecasting.
ITs are owned by their shareholders – those investors who invest in any of the trusts available – and each has a board of directors, independent of the fund manager, looking after shareholders’ interests.
An IT is a collective investment as it potentially offers a stake in hundreds of companies. This spreads the risk as the trust is not reliant on the fortunes of just one or two businesses. With investment trusts, investors’ cash is pooled, giving a fund manager a large amount of money to invest in a wide range of companies.
Provided that it is approved by HM Revenue & Customs, they are taxed in the normal way on its investment income, but its capital gains are not taxed. This avoids the double taxation which would otherwise arise when shareholders sell their shares and are taxed on their gains.