Quintessentially British, Investment Trusts allow small investors to pool together, giving access to big league spending power and the possibility of risk reduction through diversification of investment. Here we look at the basics of Investment Trusts.

Investment Trusts present the opportunity for a type of collective investment for small investors. Investment trusts are mostly to be found in the U.K, and are one of the oldest forms of mutual investment fund; the first of the Investment Trusts was established in 1868. The idea of pooling the money of small investors into Investment Trusts soon caught on, and Investment Trusts played a major part in funding the construction of the American railway system in the 19 th and 20 th centuries.

The way that Investment Trusts are organised is that a fixed number of shares in the Investment Trusts are sold on launch, and the money raised is pooled together for investment by the fund manager. This share issue means that Investment Trusts are public companies; and so the shares of Investment Trusts are traded on the stock market. Investment Trusts typically spread investment around a diverse portfolio of assets, including the shares of other companies, bonds and property. Through this diversification, the risk of investment in the stock market is reduced as effectively this risk is spread.

The benefit for the individual in investing in Investment Trusts is that a relatively small sum of money can be invested into the shares of the Trust, and in turn the diverse interests in the portfolio of the Investment Trust; the scope of these interests will typically be wider than the individual could possibly manage to buy into as a lone investor. In this principal, Investment Trusts are similar to unit trusts and OEIC (Open Ended Investment Companies), but unlike unit trusts, Investment Trusts are allowed to borrow money to invest in stocks and shares when market conditions are good, allowing Investment Trusts to take advantage of a rising market. This borrowing is referred to in technical language as ‘gearing’.

The share price of Investment Trusts is contingent on two factors. The Net Asset Value (NAV) of Investment Trusts is, in terms of an individual Trust, the combined value of the assets that the Trust has bought, and obviously has a large bearing on the share price of that Trust. However, demand for the shares of Investment Trusts also has a bearing on share price – this is the basic economics of supply and demand. Put simply, the more people want to buy into shares in Investment Trusts, the higher the price of individual Trust shares will be. When the share price of Investment Trusts is below NAV, Investment Trusts are said to be at a discount. When the share price of Investment Trusts exceeds NAV, the shares are at a premium.

There is the potential for such discounts and premiums to be both advantageous to the experienced individual investor, and a potential pitfall for the novices. Obviously, wise discount buying can lead to greater overall growth for the investor concerned, while the flip side can catch the unwary out. Investment Trusts are less popular with small investors than unit trusts and OEICs, but this may largely be due to the fact that products like unit trusts are often pushed by financial advisors on commission; while Investment Trusts do not pay commission to financial advisors.