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Investment Trust FAQs

General

  • What is the role of the manager and board of directors?

    The investment trust manager is in charge of the day-to-day running of the investment trust. They decide where to invest the money held by the trust and when to sell holdings.

    The board of directors is appointed to uphold the best interests of investors. The directors are usually independent of the investment manager and will meet on a regular basis to ensure the trust’s objectives are met.

    Like other companies, shareholders can vote to remove members from the board of directors.

  • What is net asset value (NAV)?

    The net asset value (NAV) is the value of all the assets owned by the investment trust, usually stated as a 'per share' figure. If the holdings of an investment trust, less any debt, are worth £1 million and there are two million shares in issue, the NAV per share is 50p.

    If the trust's assets increase in value, the NAV will grow, and vice versa. Growth in NAV over time is used to measure the performance of the manager.

  • What are premiums and discounts?

    The share price of an investment trust can differ from the net asset value (NAV). If the current share price is above the NAV, the investment trust is said to be trading at a premium, i.e. it costs more to buy the shares than the underlying investments are worth. When the share price is below the NAV, this is known as trading at a discount.

  • Why do investment trusts trade at a premium or discount to net asset value?

    An investment trust’s share price is determined by supply and demand. In theory, if more people are willing to buy than to sell at the current price, the price will rise. Similarly, the share price will fall if there are more investors selling than buying.

    If a trust or the area in which it invests is particularly popular, demand might push the share price to a premium over the NAV. A trust or area that is out-of-favour could trade at a discount to NAV.

  • What is gearing?

    Investment trust managers have the flexibility to borrow money in order to buy investments - this is called 'gearing'. If the total assets of a trust are worth £100 million, and the manager borrows £10 million. The gearing is 110%.

  • Why do investment trusts use gearing?

    If the trust manager believes there is a good investment opportunity, but doesn't have any spare cash within the trust, he will borrow money to cover the purchase. This avoids selling holdings to make additional investments. The manager needs to be confident they can earn a higher return on the additional investments than the cost of borrowing the money. While gearing can magnify gains if the manager is correct, it also magnifies losses if he is wrong and is therefore a higher-risk strategy.

  • What are total and net assets?

    These are a measure of the size of an investment trust. Total assets are the value of the holdings, plus cash and income for the current year, less any borrowings.

    Net assets is very similar. It is the value of holdings, plus cash and income for the current year, less any borrowings and charges.

  • Do all investment trusts pay a dividend?

    No. To find out if an investment trust has paid a dividend recently view the 'dividends' tab of our investment trust factsheets. Please remember dividend payments can vary and are not guaranteed.

  • What is the annual charge on an investment trust?

    Most investment trusts quote an 'ongoing charge' which is the estimated annual charge of holding the investment trust. This includes the annual fee paid to the fund manager for managing the portfolio, plus regular recurring costs such as directors' fees and audit fees. You can find the ongoing charge on the 'at a glance' and ‘costs’ tabs of the investment trust’s factsheet on our website. Some investment trusts also charge other ‘incidental’ costs such as performance fees which are paid to the manager if they meet certain targets. Performance fees are not included in the ongoing charges figure, but will be included in the Key Information Document of a trust. This is available on our website and will provide full details of a trust's charges.

  • What is a Real Estate Investment Trust (REIT)?

    A REIT is an investment company devoted to property investment. This means that, unlike many other property investments, it can be easily traded on the stock exchange - exactly the same as any other investment trust share. We think this can make it an attractive way for retail investors to access property investments at reasonable prices.

    In order to qualify for REIT status, at least 75% of a company’s profits must come from property rental, and 75% of the company’s assets must be involved in the property rental business. REITs must also distribute 90% of their property rental income to investors.

    In exchange for operating within these relatively strict parameters, and to encourage investment in UK real estate, REITs do not pay any corporation or capital gains tax on their property investments. Tax rules change and their benefits depend on your individual circumstances.

Buying investment trusts

VCTs

  • What is a VCT?

    Venture Capital Trusts (VCTs) are similar to normal investment trusts, but they typically invest at an early stage in a company's development which makes them higher risk. This means VCTs are aimed at wealthier, sophisticated investors who can afford to take a long-term view and accept falls in the value of their investment. Find out more about VCTs.

  • What makes VCTs different to normal investment trusts?

    Unlike a normal investment trust, a VCT manager not only invests in a company but also advises it. This could be knowledge of a particular sector or hands on experience of actually running a company. By working closely together the chosen firms should be able to expand more quickly, increasing their value and potentially providing better returns for investors.

    VCT managers normally look to invest in a company for between three and seven years after which they will look to float or sell the business, take a profit and move on. Generally, any profit is paid out to the VCT investors as a tax-free lump sum dividend and the original capital is reinvested in the next opportunity.

Have a question we haven't answered here?

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