Updated July 17, 2023
What is an Investment Trust?
The term “investment trust” refers to investment funds that are primarily closed-ended in nature and are listed on the stock exchange, similar to public limited companies.
Investors primarily find these types of investment funds in the UK and Japan. Although the name might mislead you, according to law, an investment trust is merely a separate legal entity like any other company and nothing close to what trust funds otherwise indicate. People in Japan commonly use the term “trust account” when referring to investment trusts.
Explanation of Investment Trust
Just like unit trust and open-ended investment company (OEIC), it also allows investors to invest their wealth through a single investment in an instrument with exposure in a diversified portfolio. This diversification helps the investors to mitigate unsystematic risk by investing in multiple companies.
An investment trust trades as a company on the stock exchange. Like any other listed company, an investment trust must regularly publish annual reports and audited accounts. The investment trust also mandates the presence of a board of directors (BoD), and the fund manager is accountable to the BoD. The fund’s trustees decide on the purchase of securities and distribute the fund’s income among the shareholders in dividends. When investors put their money in investment trusts, they become shareholders in that company.
Example of Investment Trust
Some of the top investment trusts funds available across the globe:
- Scottish Mortgage Investment Trust Plc: Launched on 01 Jan 1909, the fund is managed by Baillie Gifford & Co Limited and is domiciled in the UK. It is a portfolio of long-term investments selected from across the globe to generate a maximum total return for the shareholders in the form of capital gain and dividend payout. Currently, the market capital of the fund is GBP14,189.60million against a net asset value of GBP14,412.37million. Over the last 1/ 3/ 5 years, the fund has generated a total return of 90.85%/ 128.84%/ 301.74%.
- Lindsell Train Investment Trust: Launched on 22 Jan 2001. Lindsell Train Ltd manages the fund, and it is domiciled in the UK. Its objective is to maximize long-term returns while maintaining the real purchasing power of Sterling capital. Currently, the market capital of the fund is GBP216.00million against a net asset value of GBP210.92million. Over the last 1/ 3/ 5 years, the fund has generated a total return of -16.71%/ 37.76%/ 141.43%.
- Manchester & London Investment Trust Plc: Launched on 08 Dec 1997, the fund is managed by M&L Capital Management and Midas Investment Management Ltd. It is also domiciled in the UK. The fund invests in various sectors in the UK and overseas and in fixed-income securities to maximize capital appreciation while generating a reasonable income level for the investors. Currently, the market capital of the fund is GBP234.88million against a net asset value of GBP236.58million. Over the last 1/ 3/ 5 years, the fund has generated a total return of 26.39%/ 90.63%/ 221.91%.
- Monks Investment Trust: Launched on 06 Feb 1929, the fund is managed by Baillie Gifford & Co Limited and is domiciled in the UK. Its primary objective is to invest in a portfolio of globally quoted stocks to achieve maximum capital growth, which takes priority over generating regular income. Currently, the market capital of the fund is GBP2,599.53million against a net asset value of GBP2,501.83million. Over the last 1/ 3/ 5 years, the fund has generated a total return of 28.39%/ 62.79%/ 199.02%.
Investment Trust Funds
When an investment trust is launched, it raises funds from the investors by selling a fixed number of shares, and these shares are then traded on the stock exchange, like that of other public companies. Typically, the BoDassigns a professional fund manager and delegates them the responsibility of maintaining the investment fund by investing in various stocks and shares. It generally invests in a wide range of assets: listed companies, private companies, real estate, corporate/ government bonds, etc., and there is no regional restriction.
Importance of Investment Trust
Investment trusts, in general, play a significant role in mobilizing funds and their productive investment. The success of investment trusts across the globe speaks volumes for their significance. Different intermediaries use investment trusts in different ways. For instance, banking houses use these funds to offload the securities they cannot sell or control other companies, while stock exchanges earn more commission through these funds.
Some of the significant advantages of investment trusts are as follows:
- Investors can invest in a wide range of shares and other financial assets.
- These funds are usually low-risk in nature.
- These funds earn recognition for generating regular income through dividend payouts.
Some of the significant disadvantages of investment trusts are as follows:
- These investment options usually come with a lock-in period of 5 years or more, which results in blockage of funds.
- The income for these investment options is taxable, and as such, the fund’s actual return for an investor is much lower than the gain of the investment fund.
- The returns of these investment funds depend more on the fund manager than the management company.
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