Investment trusts explained

The value of the assets held by an investment trust is called the net asset value (NAV), which is calculated based on the value of all the investments the trust holds, less any liabilities, divided by the number of shares issued and expressed in pence per share.

However, as trusts are subject to supply and demand, they usually trade above or below their NAV.

A quirk of the investment trust structure is that an investor can often buy assets more cheaply than their value, for example, £1 of assets, for 80p. That can appear good value, as you pay less than the worth of assets, but it is not guaranteed that you will gain if you choose to sell.

If a trust is trading at less than its NAV, it's said to be trading at a discount. If the share price is higher than the NAV, it's trading at a premium.

Investment trusts have a reputation for low charges, partly as annual charges are paid out of a trust’s assets instead of an investor’s account.

They also promise income consistency as they can keep back part of their profit each year, passing it onto the investor in a yearly dividend.

Buy into an investment trust and you become a shareholder of a company that trades on the value of the shares it holds, minus any debts or loans it has.

It is an opportunity to pool your money with other investors and benefit from added scale and diversification.

By taking a stake across tens, even hundreds of companies, you’re not dependent on the success of a single business as you are spreading your risk. You’ll also save on dealing fees as you won’t be buying the stocks individually.

Professional fund managers are appointed by the trust’s board to look after the interests of its shareholders who work on your behalf in selecting investments.

Of course, there are running costs, plus the fund manager gets paid out of the assets. But since Investment Trusts tend not to have many employees, they have relatively low annual management charges.

As well, because there are a finite number of shares, trusts afford their fund managers a high level of control with the flexibility to build a longer-term strategy than their open-ended counterparts. They are able to buy or sell the underlying investments when the board feels the time is right.