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.