What is an Investment Trust?
The term “investment trust” refers to the investment funds that are mostly closed-ended in nature and are listed on the stock exchange similar to public limited companies. This type of investment funds are mostly found 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. In Japan, an investment trust is known as a trust account.
Explanation of Investment Trust
Just like unit trust and open-ended investment company (OEIC), investment trust also allows investors to invest their wealth through a single investment in an instrument that has exposure in a diversified portfolio. This diversification helps the investors to mitigate unsystematic risk by investing in multiple companies.
An investment trust is constituted as a company and traded on the stock exchange. Just like any other listed company, an investment trust also has to publish annual reports and audited accounts at regular intervals. It is also mandated to have a board of directors (BoD)and the fund manager of the investment trust is accountable to the BoD. The trustees of the fund decide on the purchase of securities as well as the distribution of the fund’s income among the shareholders in the form of dividends. When an investor puts his/ her money in an investment trust, then he’ she becomes a shareholder in that company.
Example of Investment Trust
Now, let us look at some of the top investment trust 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 it is domiciled in the UK. It is a portfolio of long-term investments selected from across the globe with the objective to generate a maximum total return for the shareholders, in the form of capital gain and dividend pay-out. Currently, the market capital of the fund is GBP14,189.60million against a net asset value of GBP14,412.37million. Over the period of 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, the fund is managed by Lindsell Train Ltd 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 period of 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 not only invests in various sectors in the UK and overseas but also in fixed income securities with the main objective of maximizing capital appreciation while generating a reasonable level of income for the investors. Currently, the market capital of the fund is GBP234.88million against a net asset value of GBP236.58million. Over the period of 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 it is domiciled in the UK. Its primary objective is to invest in a portfolio of globally quoted stocks in order 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 period of 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 him/ her the responsibility of maintaining the investment fund by investing in various stocks and shares. An investment trust generally invest 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, playa significant role in the mobilization of funds and their productive investment. The success of investment trust across the globe speaks volume for their significance. In fact, different intermediaries use investment trusts in different ways. For instance, banking houses use these funds to offload the securities that they are unable to sale or to control other companies, while stock exchanges earn more commission through these funds.
Some of the major advantages of investment trusts are as follows:
- Investors are able to invest in a wide range of shares and other financial assets.
- These funds are usually low-risk in nature.
- These funds are known for generating regular income in the form of dividend pay-out.
Some of the major 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 fund.
- The income for these investment options is taxable and as such the real return of the fund for an investor is much lower than the gain of the investment fund.
- The returns of these investment funds are more dependent on the fund manager than the management company.
This is a guide to Investment Trust. Here we also discuss the introduction and importance of investment trust along with advantages and disadvantages. You may also have a look at the following articles to learn more –