Investment trusts

Investment trusts are companies that invest in the shares of other companies for the

purpose of acting as a collective investment.

Investors&# money is pooled together from the sale of a fixed number of shares a trust

issues when it launches. The board will typically delegate responsibility to a professional

fund manager to invest in the stocks and shares of a wide range of companies (more than

most people could practically invest in themselves). The investment trust often has no

employees, only a board of directors comprising only non-executive directors. However

in recent years this has started to change, especially with the emergence of both private

equity groups and commercial property trusts both of which sometimes use investment

trusts as a holding vehicle.

Investment trust shares are traded on stock exchanges, like those of other public

companies. The share price does not always reflect the underlying value of the share

portfolio held by the investment trust. In such cases, the investment trust is referred to as

trading at a discount (or premium) to NAV (net asset value).

The investment trust sector, in particular split capital investment trusts, suffered

somewhat from around 2000 to 2003 after which creation of a compensation scheme

resolved some problems.

One of the key differences between an investment trust and a unit trust, is that an

investment trust manager is legally allowed to borrow capital to purchase shares. This

leverage may increase investment gains but also increases investor risk.