What is an investment trust?

An investment trust is a public limited company listed on the stock exchange that pools money from investors to invest in a portfolio of assets (shares, bonds, property, infrastructure, etc.). Unlike open-ended funds (OEICs/unit trusts) where new units are created when investors buy in, investment trusts have a fixed number of shares that trade on the stock market. This means the share price can be higher (at a premium) or lower (at a discount) than the underlying value of the assets (the Net Asset Value or NAV). Investment trusts can also borrow money to invest (gearing), which can amplify returns — and losses.

What is a discount or premium on an investment trust?

Because investment trust shares trade on the stock exchange, the share price is set by supply and demand — not by the underlying asset value. If the share price is lower than the NAV per share, the trust trades at a 'discount' (e.g., you're effectively buying £1 of assets for 90p). If the share price is higher than NAV, it trades at a 'premium' (e.g., paying £1.10 for £1 of assets). Buying at a discount can boost returns if the discount narrows. Popular trusts often trade at a premium, while out-of-favour trusts trade at discounts — sometimes significant ones.

What is gearing in investment trusts?

Gearing means the investment trust borrows money to invest. For example, if a trust has £100 million from shareholders and borrows £20 million to invest, it has 20% gearing. If the investments rise 10%, the trust's portfolio grows by £12 million (10% of £120m), which is a 12% return on the original £100m of shareholder assets. However, gearing works both ways — if investments fall 10%, losses are also amplified. Gearing is one of the key features that differentiates investment trusts from open-ended funds, which generally cannot borrow.

Are investment trusts better than open-ended funds?

Neither is inherently better — they suit different purposes. Investment trusts can be better for: accessing illiquid assets (property, infrastructure, private equity) because the closed-ended structure means the manager doesn't have to sell assets to meet redemptions, income seekers (trusts can smooth dividends by holding back income in good years), and long-term investors who can benefit from buying at a discount. Open-ended funds can be better for: investors who want NAV pricing (no discount/premium risk), simpler structures, and situations where you want your money back at exactly the asset value.

Investment Trusts Guide UK — How They Work & How to Invest | PocketWise

Investment trusts are one of the oldest forms of collective investment in the UK. Here’s how they work and whether they suit your portfolio.

At a Glance

Feature	Detail
What it is	A public limited company listed on the stock exchange
Structure	Closed-ended — fixed number of shares
Where they trade	London Stock Exchange (and others)
Can they borrow?	Yes (gearing) — unlike open-ended funds
Share price	Set by supply and demand, not NAV
Discount/premium	Shares can trade above or below the value of underlying assets
Dividends	Can hold back revenue reserves to smooth dividend payments
Regulation	FCA-regulated; listed company rules apply
Tax wrapper	Can be held in ISAs and SIPPs

How Investment Trusts Work

Step	Detail
1	The trust launches and raises money from investors via an IPO
2	A fund manager invests the pooled money in a portfolio of assets
3	The trust has a fixed number of shares that trade on the stock exchange
4	Investors buy and sell shares on the market (like any other listed company)
5	The share price is set by supply and demand
6	Income from investments is paid as dividends to shareholders
7	The trust can borrow (gear) to invest more than its net assets

Investment Trusts vs Open-Ended Funds vs ETFs

Feature	Investment trust	OEIC / Unit trust	ETF
Structure	Closed-ended company	Open-ended (new units created)	Open-ended (listed)
Price	Market price (discount/premium)	NAV price	Close to NAV
Can borrow?	Yes (gearing)	No	Generally no
Revenue reserves	Yes — can smooth dividends	No	No
Ongoing charges	0.3–1.5%	0.1–1.5%	0.05–0.5%
Trading	Like stocks (real-time)	Once daily (at NAV)	Like stocks (real-time)
Illiquid assets?	Ideal (property, PE, infrastructure)	Problematic (may gate)	Some (but limited)
Board of directors	Yes — independent oversight	No	No
Stamp duty	0.5% on purchase	None	None

Discounts and Premiums

Concept	What it means
NAV (Net Asset Value)	The total value of the trust’s underlying investments, divided by the number of shares
Discount	Share price is lower than NAV — you’re buying assets for less than they’re worth
Premium	Share price is higher than NAV — you’re paying more than the assets are worth
Discount narrowing	An extra return if the discount shrinks after you buy
Discount widening	An extra loss if the discount grows after you buy

Typical Discounts/Premiums by Sector

Sector	Typical range
UK equity	−5% to +5%
Global equity	−5% to +5%
Property	−20% to +10%
Infrastructure	−10% to +10%
Private equity	−20% to −40%
Emerging markets	−10% to +5%

Discounts and premiums fluctuate with market sentiment. Check current discount on the AIC (Association of Investment Companies) website.

Gearing

Feature	Detail
What it is	Trust borrows money to invest more than its net assets
Typical gearing	5–20% of net assets
Effect in rising market	Amplifies gains
Effect in falling market	Amplifies losses
Cost	Interest on borrowings reduces returns slightly
Where to check	Trust’s factsheet or annual report

Gearing Example

Scenario	No gearing	20% gearing
Shareholder assets	£100m	£100m
Borrowed	£0	£20m
Total invested	£100m	£120m
Market rises 10%	+£10m (+10%)	+£12m (+12%)
Market falls 10%	−£10m (−10%)	−£12m (−12%)

Dividends

Feature	Detail
Revenue reserves	Trusts can hold back up to 15% of income each year to build reserves
Dividend smoothing	Reserves allow trusts to maintain or grow dividends even in bad years
Dividend heroes	Some trusts have raised dividends for 20, 30, even 50+ consecutive years

AIC “Dividend Heroes” (50+ Years of Increases)

Trust	Consecutive years of dividend growth
City of London	58+
Bankers	57+
Alliance Trust	57+
Caledonia Investments	57+
BMO Global Smaller Companies	53+

These are among the longest dividend growth records in the UK.

Popular Sectors

Sector	What they invest in	Example trusts
UK equity	UK-listed shares	City of London, Mercantile
Global equity	Worldwide shares	Scottish Mortgage, F&C Investment Trust
Infrastructure	Roads, hospitals, wind farms, solar	HICL, International Public Partnerships
Renewable energy	Solar, wind, battery assets	Greencoat UK Wind, Bluefield Solar
Private equity	Unlisted companies	HgCapital, Pantheon International
Property	Commercial/residential property	TR Property, BMO Commercial Property
Income	High-yield bonds and equities	Murray International, Henderson High Income
Technology	Tech sector	Polar Capital Technology, Allianz Technology

Costs

Cost	Detail
Ongoing Charges Figure (OCF)	Annual management fee — typically 0.3–1.5%
Stamp duty	0.5% on purchase (unlike OEICs and ETFs)
Platform fee	0–0.45% depending on your broker
Dealing fee	£0–£12 per trade depending on platform
Performance fee	Some trusts charge a bonus if they beat their benchmark

Tax Treatment

Tax	Detail
Dividends	Taxed at dividend rates (8.75% / 33.75% / 39.35%) after £1,000 dividend allowance
Capital gains	CGT on profits above £3,000 annual exempt amount
In an ISA	Tax-free — no dividend tax or CGT
In a SIPP	Tax-free within the pension wrapper
Stamp duty	0.5% on purchase — applies even in ISAs

How to Invest

Step	Detail
1	Open an account with an investment platform (Hargreaves Lansdown, AJ Bell, Interactive Investor, etc.)
2	Choose your account type (ISA, SIPP, or general account)
3	Search for the investment trust by name or ticker symbol
4	Check the discount/premium, ongoing charges, gearing, and dividend history
5	Place a buy order (market or limit order)
6	Dividends are paid into your account automatically

Risks

Risk	Detail
Discount widening	Share price can fall further than NAV — especially in a sell-off
Gearing losses	Borrowing amplifies losses in falling markets
Market risk	Underlying investments can fall in value
Illiquidity	Some smaller trusts have low trading volumes — hard to buy/sell at a fair price
Manager risk	Performance depends heavily on the fund manager
Cost drag	Higher charges than passive ETFs reduce long-term returns

Investment Trusts Guide UK — How They Work & How to Invest

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