Investment trusts: everything you need to know

Investment trusts are one of the oldest forms of investment vehicles available to private investors. We break down everything you need to know in 2025.

Investment trusts are the original collective fund. The first one – Foreign & Colonial – was launched in 1868 “to give the investor of moderate means the same advantages as the large capitalists”.

Originally, investment trusts would invest in an eclectic mix of government bonds (in the case of F&C), railroad bonds (in the case of Dunedin Income Growth), or the newly emerging opportunities in America (in the case of Scottish American).

Today, they are more likely to be invested in a portfolio of stock market holdings, property or infrastructure assets.

They have a range of characteristics that set them apart from other collective funds such as unit trusts and OEICs.

First, they are exchange-listed, which means that you can buy and sell them like a normal share. This also means that the price is determined by supply and demand in the market and may differ from the value of the underlying assets (the NAV).

The gap between the share price and the assets may be a discount or a premium to NAV. This can be an advantage or disadvantage for investors.

If they buy a trust at a significant discount, the discount narrows and the price goes up, they can receive a double whammy of gains. However, the effect may also work in reverse.

It also means that the managers of investment trusts have a captive pool of assets to invest. Unlike with a unit trust or OEIC, they do not have to sell the underlying holdings to meet redemptions.

This means investment trusts can be a good option to manage less liquid assets – such as smaller companies, emerging markets, property or infrastructure, where there may not be an instant market.

This is why there is such an astonishing choice within the investment trust sector, with everything from care homes to aircraft leasing, renewable energy infrastructure to battery storage.

These sit alongside more familiar options, such as global growth investment trusts, which hold a blend of international equities, or UK equity income funds.

The ‘closed-ended’ nature of investment trusts provides some other advantages. If an investment is having a difficult patch, open-ended fund managers can be forced sellers into a difficult market.

They may be forced to sell their prized holdings because that is where there are buyers. Investment trust managers don’t have this pressure, and that can lead to stronger long-term performance.

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Gavin Haynes, investment consultant at Fairview Investing, says: “There are a number of areas that are better suited to the closed end structure of an investment trusts. Particularly when the underlying assets are illiquid and you want daily liquidity. 

“Private equity is one key area where I still favour investment trusts. As the holdings are not listed on an exchange this can provide less transparency in valuing the underlying assets and this can lead to them trading at discounts – but this is a price to pay for the liquidity.

“Commercial property and infrastructure are two other areas where investment trusts make sense to gain exposure to illiquid markets. Both have suffered headwinds of a rising interest rate environment. However, both areas can offer an attractive income and add diversification to a portfolio.

Income and gearing

Many investment trusts will pay healthy dividends. Dan Coatsworth, investment analyst at AJ Bell, says: “Investment trusts are also a popular hunting ground for income, with big yields from companies across the property, renewable energy and debt sectors.”

The investment trust structure allows fund managers to store up income from the underlying investments in buoyant years, to pay it out in tougher years.

This had its ultimate test during the pandemic, when dividends in the UK market crashed 44% as companies held back payouts amid widespread uncertainty. Open-ended funds had to take the full force of dividend cuts for companies in their portfolio.

However, UK equity income dividends from trusts were actually higher in 2020 than in 2019, according to Link.

Link estimated that trusts came into the pandemic with a £2 billion buffer. They used up around £0.3bn in shoring up their payouts to investors, but it meant that investment trust investors did not feel nearly the same pain as those investing in unit trusts or OEICs.  

The other structural quirk for investment trusts is that they can take on gearing to magnify returns. This can backfire if markets go against them, but over time, stocks markets tend to go up, so this can improve the returns to investors. Investment trust managers may also use gearing to boost the dividends.

Boards

Investment trusts have independent boards that are there to look after the interests of the shareholder.

The board appoints the investment manager and has the power to fire them if necessary. The board will also negotiate on investment management fees, determine the level of gearing and buy backs, while also dealing with compliance issues on the trust.

More recently, boards have been put to test. Weakening demand for some investment trusts in the wake of the pandemic left them with wide discounts and vulnerable to activist shareholders.

Boaz Weinstein, founder of Saba Capital, has targeted a number of trusts, with the aim of taking them over and installing his own fund managers and board members.

Investment trust boards have had to defend their trusts, galvanise shareholders to vote against the proposals and make the case for the investment strategy to be maintained. In some cases, they have bought back shares with the aim of narrowing the discount.

While Saba still has an interest in some trusts, he was comprehensively defeated in his attempts to take over the assets.

It may be that the investment trust industry emerges stronger in his wake. Certainly, it has shown the power of boards to defend shareholder interests. The investment trust remains a happy hunting ground for the active investor.

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