What Is An Investment Trust?

An investment trust is a type of collective investment which is very different to most others which an investor may have used or heard about. They use investors money to pool together and create a diversified portfolio of holdings.

However, unlike most other collective investment vehicles, they are have a fixed number of shares available and are companies rather than funds. To the best of your author's knowledge, this makes them unique. They are quoted on the London Stock Exchange (LSE).

Investment trusts are also very old and the first, operated by Foreign and Colonial (F&C) was founded in 1868. Over time, other vehicles - such as unit trusts and OEICS - have been marketed aggressively and have taken a big lead in the race for investors money. But, year in and year out, the big investment trust companies keep managing huge sums of money.

As with most other collective investments, an investment trust is generally targetted at one section of the world or stock market. This means that they do have rules as to where they can and cannot put their funds. These rules are usually laid down in their Articles of Association.

It goes without saying that some areas and sectors offer more or less risks to the investor than other areas and as such, some funds are affected by currency movements or other economic events.

Depending upon their individual rules, some can invest in other countries, provide venture capital to small and expanding firms or invest in differing types of company - after all, not all successful firms have a stock market listing!

Finance and human nature being what they are, there have been some scandals over the years. Some trusts have rules that seem to be designed to perplex, things like 'Zeros' and 'Split Capital' that are explained on the pages of this section and investors should look out for. These things are not necessarily bad per se, but most private investors would need to think very clearly about potential the implications of them before committing any money.

There are other factors, such as the way these companies trade in the market relative to their net asset value, that make them unique. These factors will be explained further in this section of the site.

Despite their age, most private investors in the United Kingdom know nothing about these unusual companies and so there are some value opportunities to be found - with the proper research of course - in this market simply because the majority of available money is 'looking the other way'.

The rules

These investment trust companies are regulated by UK law which is overseen by the Inland Revenue (HMRC), the FSA and Companies Acts. The managers and marketers are governed by the Financial Services and Markets Act (2000).

However, the FSA also has principles to be followed for prospective investment trusts. These could almost be described as investment trust listing requirements. They include:

The trust must have a board which is independent of management

The trust should not be a dealer in investments

The investment management must comply with rules as to their experience and competence

There should be an adequate spread of risk

The Inland Revenue (HMRC) can grant section 842 approval for a new trust. The FSA insists that this should happen, but in truth, it is in the best interests of both management and shareholders that it is done. Section 842 of the Income and Corporation Taxes Act 1988 enables a trust to sell investments - such as shares - and not be liable for taxation on any capital gain that may have been made.

There are a number of rules to be complied with for s.842 approval - for example:

It cannot invest more than 15% of total assets in just one company

The company must be resident in the UK and cannot be controlled by 5 or less people

The ordinary shares must be quoted on the London Stock Exchange

There are a few investment management companies which are managed outside the UK but are registered inside that can qualify as an Investment trust. These companies will also be listed on the London Stock Exchange and have s.842 approval. It is wise for private investors to check the individual tax situation of such organisations.

As a plc (Public Limited Company) such an investment vehicle is formed and controlled by the Companies Acts. These ensure that at formation there are Memorandum and Articles of Association which must be followed by company management.

The pages of this section will look at various aspects of this wide topic. We hope that you find the following pages to be both useful and informative:

What Are The Investment Trust Sectors?

Learn Some Basic Investment Trust Information

How Does Investment Trust Net Asset Value Work?

How Do Investment Trust Share Buybacks Work?

What Is An Investment Trust Savings Scheme?

How Much Are Investment Trust Annual Charges?

What Are The Different Investment Trust Share Classes?