Investment trusts have several unique characteristics that make them different from other collective investments like unit trusts or OEICs:
Key Differences
Closed-ended structure
Active gearing
Trading at discount
Independent Board of Directors
Closed-ended structure
While unit trusts are open-ended, which means the underlying funds get larger or smaller as investors invest in or leave the fund, investment trusts are closed vehicles. This means they issue a fixed number of shares and it is these shares which are bought and sold by investors without affecting the trust's underlying portfolio. Consequently, the manager has more opportunity to take longer-term investment decisions.
Active gearing
Investment trusts have the ability to borrow money or "gear" their portfolios to take advantage of a favourable situation or purchasing opportunity without having to sell existing investments. The aim is to make sufficient return on the investment to be able to pay the interest on the loan, repay it and then make an additional profit. The level of borrowing that a trust undertakes will be matched by an equivalent level of risk, so the greater the borrowing, the higher the risk and potential level of returns. It should be noted, however, that gearing can potentially magnify investment losses so must be carefully managed. You should only hold highly geared investment trusts if you accept the risks involved.
Trading at discount
While the prices of OEICs and unit trusts are calculated depending on the value of their assets, the price of shares in an investment trust is established by the stockmarket which means the shares will often tend to trade at a "discount" i.e. when a share price is lower than the value of the underlying assets, expressed as the net asset value per share (NAV).
Independent Board of Directors
Unlike other investment vehicles, investment trusts are companies listed on the stock market, which means that they must have independent boards of directors who are directly answerable to the shareholders (i.e. the investors). The Shareholders may, if the situation arises, challenge the actions of the Directors, call for changes in the way the trust is managed or vote for or against actions proposed by the Board at the AGM or other special shareholder meeting which take place throughout the year.
