Investment trusts are distinct from other fund types like open-ended investment companies (OEICs) and exchange-traded funds (ETFs) due to their closed-ended nature and fixed share capital. When investing in an investment trust, shares are bought from or sold to other investors on the stock market, meaning these trades do not affect the money held within the trust.
This permanent capital structure is considered a strength, as fund managers are not required to invest new cash or sell assets to meet redemptions. This characteristic is particularly beneficial for investments in assets that may not be easily or quickly sold, such as infrastructure, private equity, real estate, or small-cap companies, and for certain long-term investment strategies.
While OEICs always trade at their net asset value (NAV) and ETFs typically trade close to NAV, investment trusts can trade at a discount or premium to their underlying NAV. Buying shares at a discount to NAV can amplify gains if the discount narrows, in addition to the underlying investment return. Investment trusts also have options such as borrowing to acquire additional assets, known as gearing, which has the potential to increase returns but can also amplify losses. They can also retain some income to maintain steady dividends and, as listed companies, have a board to oversee investor interests and the option to replace the manager.