Investment trusts are a type of collective investment vehicle. Unlike ETFs or mutual funds, they’re companies listed on the stock exchange whose business is investing.
Investment Trust vs ETF vs Mutual Fund
| 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 |
Premium and Discount
Investment trusts trade at either a premium or discount to their Net Asset Value (NAV).
| 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 |
Why Discounts Exist
| Reason | Explanation |
|---|
| Unpopular sector | Trust in a hated sector trades at discount |
| Poor performance | Manager underperforms |
| Large discount | Market expects issues |
| Small size | Illiquid trust |
Why Premiums Exist
| Reason | Explanation |
|---|
| Popular sector | Trust in a hot sector |
| Strong performance | Manager outperforms |
| Limited supply | No new shares created |
| Unique strategy | Hard to replicate elsewhere |
The Benefits of Gearing
Investment trusts can borrow money to invest (gearing/leverage).
| 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 a double-edged sword. Check the trust’s gearing level before investing.
Why Investment Trusts Are Underrated
| 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 |
Popular Investment Trusts
| 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 |
How to Invest
| Method | Platform |
|---|
| Directly on stock exchange | Any broker (HL, AJ Bell, Trading 212) |
| Regular investing | Vanguard (limited), Freetrade |
| Dividend reinvestment | Most brokers offer DRIP |
Key Metrics to Check
| 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 unique advantages over ETFs — the ability to trade at a discount and the option to use gearing. They’re particularly good for income investors (many have 40+ years of dividend increases) and for accessing specialist sectors like private equity or infrastructure. Buy at a discount, check the gearing, and hold long-term.
This content is for educational purposes only. Not financial advice. Do your own research before investing.