An investment trust is a public limited company (PLC) traded on the London Stock Exchange, so investors buy and sell from the market. It invests in other companies, seeking to generate profit for its shareholders.
Essentially, your money is pooled with contributions from many other people, and used to buy a portfolio of investments. Just like other types of investment funds.
But investment trusts are unique—after all, they’ve been around for over 150 years; that’s a lot longer than other investments—chosen and managed by an expert team, giving you access to a much wider and more diversified portfolio.
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Investment trusts can borrow money in order to buy investments, known as gearing. It can magnify the trust’s performance, but this happens whether it rises or falls in value, so it can boost gains or increase losses.
It’s important to remember that the interest has to be paid on the borrowed money, whether or not the trust makes a profit on the loan.
The net asset value (NAV) is the value per share of all the assets owned by the investment trust. That is, the combined value of all the assets.
They’re affected by supply and demand, as their shares are listed on the London Stock Exchange—essentially, market demand. This means that share prices may be bought and sold higher or lower than the NAV.
Changes in the difference between the NAV and the share price can magnify the gains or losses on your investment.
If you pay less than the NAV for your shares, you’re buying at a “discount.” If you pay more, you’re buying at a “premium.” However, the discount can change, meaning there is an extra level of risk in buying investment trust shares.
Discounts widen when the share price falls further behind the NAV, which can happen whether the market is rising or falling. In a rising market, shareholders may not notice a widening discount because the share price will often still be going up. However, if discounts widen when the NAV falls, it magnifies the loss.
Of course, the opposite is true. In some circumstances, the discount can narrow while the NAV falls, which reduces the overall loss.
Take a look at the table below for a quick overview:
These are shares that give you the opportunity to buy ordinary shares in the trust in the future at a pre-arranged price. This could mean being able to buy shares for less than the market price.
An example of an investment trust that does so is Fidelity Asian Values PLC.
Like all funds, investment trusts can rise and fall in value. However, they have more factors affecting their performance (such as supply and demand), which can mean they are more volatile and, therefore, a more risky investment.
As a result, investors need to take a range of factors into account when looking at an investment trust. In addition to the risk that the market as a whole will rise or fall, an investor needs to think about:
One of the reasons trusts tend to trade at a discount, is that there is a perception their shares can be difficult to buy or sell on occasion (on other words, they’re less liquid) as, unlike funds, a buyer must be found in order to sell your shares.
However, boards have focused more and more over the years on ways to improve liquidity in order to help close the discount to shareholders’ benefit.
In order to give our customers even more peace of mind, we’ve also ensured that all the trusts we offer have market capitalisations of around £100 million or more. This should mean there are enough shares in circulation to avoid the risk of investors not being able to sell when they want to.
The value of your investments may go down as well as up and you may not get back what you invest. Fidelity can give you information and guidance on products and services, but cannot give advice based on personal circumstances. If you're unsure of the suitability of an investment, please speak to a financial adviser.
As the trusts may invest overseas, the return may increase or decrease as a result of currency fluctuations.