Investment trusts

Money Advice Service

An investment trust is a company that raises money by selling shares to investors and then pools that money to buy and sell a wide range of shares and assets. Different investment trusts will have different aims and different mixes of investments.

When might an investment trust be for you?

Make sure you really understand a financial product before you buy it.

An investment trust might be for you if:

  • you want a potentially higher return than from a unit trust or OEIC and are willing to take a little more risk
  • you’re happy to tie up your money for at least five years
  • you understand that the value of your investment can go up or down so you could get back less than you put in.

How are investment trusts different to unit trusts?

  • Investment trusts, unlike unit trusts, can borrow money to buy shares, which is known as gearing. This extra buying potential can produce gains in rising markets but also accentuate losses in falling markets. Investment trusts generally have more freedom to borrow than unit trusts that can be sold to the general public.
  • Unlike with a unit trust, if an investor wants to sell their shares in an investment trust they must find someone else to buy their shares. Usually this is done by selling on the stock market. The investment trust manager is not obliged to buy back shares before the trust’s winding up date.
  • The price of shares in an investment trust can be lower or higher than the value of the assets attributable to each share – this is known as trading at a discount or at a premium.

How investment trusts work

Conventional investment trusts

  • Investment trusts are constituted as public limited companies and issue a fixed number of shares. Because of this, they are referred to as closed-ended funds.
  • The trust’s shares are traded on the stock exchange like any public company.
  • The price of an investment trust’s shares depends on the value of its underlying assets and the demand for its shares.
  • Investment trusts are allowed to borrow money to buy shares (a practice known as gearing). Different investment trusts will do this at varying levels. It’s worth checking before you invest because the level of gearing can affect the return on your investment and how risky it is.

Split Capital Investment Trusts

  • These run for a specified time, usually five to ten years, although you are not tied in.
  • This type of investment trust issues different types of shares. When they reach the end of their term, payouts are made in order of share type.
  • You can choose a share type to suit you. Typically the further along the order of payment the share is the greater the risk, but the higher the potential return.

Risk and return

  • Bear in mind the price of shares in an investment trust can go up or down so you could get back less than you invested.
  • The level of risk and return will depend on the investment trust you choose. Find out what type of assets the trust will invest in, as some are riskier than others.
  • Look at the difference between the investment trust’s share price and the value of its assets as this gap may affect your return. If a discount widens, this can depress returns.
  • Find out if the investment trust borrows money to buy shares. If so, returns might be better but your loses greater.
  • With a split capital investment trust, the risk and return will depend on the type of shares you buy.

Access to your money

You can sell your shares at any time, although investment trusts are most suitable for long-term investments (over five years). You will have to pay a stockbroker to buy and sell them.

Charges

  • As with any quoted share, an investment trust price will be quoted with a ‘bid-offer spread’ – this means you’ll get a different price if you’re selling to what you’ll pay if you’re buying.
  • Investment trusts charge an Annual Management Charge (AMC) which is paid to the organisation managing the portfolio. Most investment trusts will quote an ‘ongoing charge’ figure which is the estimated annual charge of holding the investment trust. This includes some regular recurring costs such as director and audit fees.
  • Investment trusts may charge for other ‘incidental’ costs such as performance fees which are paid to the manager if they meet certain targets. Although this is not normally included within the ongoing charges figure, this information can normally be found in the Key Information Document.
  • You will have to pay Stamp Duty of 0.5% on any purchases.
  • You may also be charged a stockbroker’s commission on buying and selling any shares within the investment trust.

Safe and secure?

Check that your fund manager is covered by the Financial Services Compensation Scheme. This will mean that if they go bust and owe you money, you’re entitled to up to £50,000 compensation.

Poor investment performance is not an event that leads to compensation.

How to buy shares in an investment trust

You can buy shares from a stockbroker or directly through an Investment Trust Savings and Investment Scheme (ITSS) or from an online share dealing facility, through an IFA and financial planners.

Shares can also be purchased directly from some investment trust managers.

Tax

  • As of April 2018, all individuals are eligible for a £2,000 tax-free Dividend Allowance. Dividends received by pension funds or received on shares within an ISA will remain tax free and won’t impact your dividend allowance. You can find more information and examples in GOV.UK’s Dividend Allowance factsheet.
  • Many unit trusts can be held in an ISA. In this case, your income and capital gains will be tax-free. Read our guide ISAs and other tax-efficient ways to save or invest.
  • Any profit you make from selling shares outside an ISA may be subject to Capital Gains Tax.

If things go wrong

Many investment management firms employed by investment trusts are regulated by the Financial Conduct Authority.

Find out what to do to Sort out a money problem or make a complaint.

This article is provided by the Money Advice Service.

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