Investment Trust

Understanding Investment Trusts

An investment trust is a publicly listed company that invests in a portfolio of assets, such as stocks, bonds, property, or other securities. Unlike open-ended funds, investment trusts have a fixed number of shares, which are traded on a stock exchange, similar to individual company shares. This structure provides liquidity for investors and allows the fund’s value to trade at a premium or discount to its net asset value (NAV).

Key Concepts

• Closed-End Structure: A fixed number of shares are issued.
• Stock Exchange Trading: Shares can be bought and sold throughout the trading day.
• Professional Management: Fund managers make investment decisions.
• Premium/Discount to NAV: Share price can differ from the underlying asset value.

Deep Dive: How They Work

When an investment trust is launched, it raises capital by issuing shares. This capital is then invested by a fund manager according to a specific investment objective. Investors buy and sell these shares on the secondary market. The value of the trust’s assets (NAV) is calculated daily, but the market price of its shares is determined by supply and demand. If demand is high, shares may trade at a premium; if low, they may trade at a discount.

Applications and Benefits

Investment trusts are used for various investment goals, including income generation, capital growth, or exposure to specific sectors or geographies. Their closed-end structure can be advantageous for investing in illiquid assets, as managers don’t face constant redemption pressures. They also offer diversification and professional expertise.

Challenges and Misconceptions

A common misconception is that the share price always reflects the NAV. The premium or discount can be influenced by market sentiment and investor demand. Gearing (borrowing to invest) can amplify both gains and losses, making them potentially riskier than some other investment vehicles. Understanding the impact of fees and charges is also crucial.

FAQs

Q: How is an investment trust different from an open-ended fund?
A: Investment trusts have a fixed share structure and trade on an exchange, while open-ended funds create and cancel units daily based on investor demand.

Q: Can I lose more than my initial investment?
A: Yes, if the trust uses gearing and its investments perform poorly, you could lose more than your initial investment.

Q: What does it mean when an investment trust trades at a discount?
A: It means the market price of the trust’s shares is lower than the value of its underlying assets.