Investment trusts are easy to overlook, yet they are one of the oldest and most flexible ways to own a spread of assets in a single holding. At first glance they look a lot like ETFs or mutual funds, but they work on a subtly different legal structure that brings both extra power and extra risk. Understanding that difference — the premium and the discount, the ability to borrow, the freedom to smooth dividends — is what turns investment trusts from a confusing corner of the market into a genuinely useful tool. This guide walks through how they work, what to check before you buy, and which well-known names are worth knowing.
What an investment trust actually is
An investment trust is a company listed on the stock exchange whose entire business is investing. When you buy shares in a trust, you are buying a stake in a pool of assets managed on your behalf. The word “trust” is a little misleading — modern trusts are companies with a board and a manager, but the principle holds: a professional manager decides what to hold, and you own a slice of the whole portfolio.
The crucial feature is that a trust is closed-ended. It issues a fixed number of shares when it launches, and it does not create or destroy them to match demand the way an open-ended fund does. That single difference drives almost everything else about how trusts behave. Because the number of shares is fixed, the price investors pay is set by supply and demand on the stock exchange, and it can drift away from the actual value of the underlying assets.
To compare trusts with the alternatives, it helps to line them up side by side:
| Feature | Investment Trust | ETF | Mutual Fund (OEIC) |
|---|---|---|---|
| Structure | Company (listed) | Open-ended fund | Open-ended fund |
| Price vs NAV | Premium/discount | Close to NAV | At NAV |
| Can use gearing | Yes | No | Limited |
| Closed-ended | Yes (fixed shares) | No (create/redeem) | No (create/redeem) |
| Trading | On exchange | On exchange | Direct with provider |
| Dividends | Can retain up to 15% | Must distribute | Must distribute |
The premium and the discount
Because the share price is set by the market rather than by the fund’s own valuation, a trust’s price rarely sits exactly on top of its Net Asset Value — the combined value of everything it owns, per share. When investors are keen to buy, the price rises above NAV and the trust trades at a premium; when they are selling, it falls below and the trust trades at a discount.
| Price vs NAV | Meaning |
|---|---|
| At a premium (> NAV) | Investors pay more than assets are worth |
| At a discount (< NAV) | Investors pay less than assets are worth |
| At NAV (= assets) | Fair value |
Discounts are the more common state of affairs, and they are worth understanding because they are both an opportunity and a red flag. A trust in an unpopular sector, one whose manager has underperformed, or one that is small and hard to trade can sit at a persistent discount. In those cases the market is effectively pricing in a problem, and the discount tells you to ask why. The same applies on the other side: a hot sector, a manager on a strong run, limited supply of shares, or a genuinely unique strategy can push a trust to a premium, meaning you are paying more than the assets are worth.
The professional habit is simple: buy at a meaningful discount and avoid paying a large premium. When you buy at a 10% discount, you own the assets for 90p on the pound — a cushion against an ordinary outcome and a genuine head start if the discount ever narrows.
Gearing: the double-edged sword
The second big difference is gearing, which is simply borrowing. Because a trust is a company, it can take on debt to buy more investments on top of the money shareholders have put in. In a rising market this amplifies your gains — the borrowed money earns returns that flow back to shareholders on top of their own capital. In a falling market it works the same way in reverse, amplifying losses.
| In a Rising Market | In a Falling Market |
|---|---|
| Borrowing amplifies gains | Borrowing amplifies losses |
| Trust outperforms | Trust underperforms |
| Higher returns for shareholders | Higher losses for shareholders |
Gearing is rarely all-or-nothing; most trusts run a modest level, and some are entirely ungeared. The important thing is that you check the gearing level before you buy, because it changes the risk profile of the holding entirely. A trust with heavy gearing in a downturn can fall far further than the assets it owns, which is exactly the kind of surprise that catches unprepared investors out.
Why they are underrated
Set aside the jargon and trusts offer some genuinely useful advantages. The ability to trade at a discount means patient investors can buy assets for less than they are worth — something an ETF never gives you. Gearing provides higher potential returns in good markets. And because a trust is a company with a board rather than a fund with daily redemptions, it enjoys several structural perks:
| Advantage | Why It Matters |
|---|---|
| Can trade at discount | Buy assets for 90p on the pound |
| Gearing potential | Higher returns in good markets |
| Income smoothing | Can retain dividends in good years |
| Long-term focus | No forced selling by investors |
| Specialist sectors | Access to private equity, infrastructure |
| Lower ongoing costs | OCF often lower than OEICs |
The income smoothing point deserves special attention. A trust can retain up to about 15% of its income in a good year and hold it back to top up dividends in a lean one. That is why many income-focused trusts have an extraordinary record of consecutive dividend increases — City of London, for example, is famous for stretching its dividend growth across more than four decades. Open-ended funds cannot do this because they must distribute their income, leaving them more exposed to the swings in company payouts.
Well-known trusts to know
Trusts span every imaginable strategy, but a handful of names come up again and again, and they illustrate the range on offer:
| Trust | Sector | 5-Year Return |
|---|---|---|
| Scottish Mortgage (SMT) | Global growth | Variable (tech-heavy) |
| F&C (FCIT) | Global equity | Reliable performer |
| City of London (CTY) | UK income | Consistent dividends |
| RIT Capital Partners (RCP) | Multi-asset | Lower volatility |
| Greencoat UK Wind (UKW) | Renewable infra | Stable income |
What to check before you invest
Investment trusts are bought directly on the stock exchange, just like a share, through any mainstream broker — platforms such as Hargreaves Lansdown, AJ Bell and Trading 212 offer them, and some providers support regular investing and dividend reinvestment plans. Before you commit, run through a short list of metrics:
| Metric | What It Tells You |
|---|---|
| Premium/discount | Are you buying cheap or expensive? |
| Ongoing charges (OCF) | Annual cost |
| Gearing level | How much they’ve borrowed |
| Dividend yield | Income return |
| Discount history | Has it persistently traded at discount? |
| Manager tenure | How long has the manager been there? |
Bottom line
Investment trusts offer two things most funds cannot: the chance to buy at a discount to the value of the assets, and the option of gearing that can lift returns in the right conditions. They are especially attractive to income investors, thanks to dividend records stretching back decades, and to anyone who wants exposure to specialist areas like private equity or infrastructure that open-ended funds struggle to reach. The approach that makes them work is the professional one — buy at a discount, check the gearing, and hold long-term rather than trading in and out on the premium-discount swings. None of this is financial advice; it is a framework for understanding a genuinely useful, and genuinely underrated, part of the investing toolkit.