What is an investment trust?

A strange language is spoken on Planet Finance. It often seems designed to baffle the average investor, and save the richest pickings for the professionals. Take, for example, ‘investment trusts’ — they’re investments, certainly, but they are not trusts. And since blind faith is the last thing to invest in any money-making exercise, the two terms make an odd pairing.

The most important decision an average investor has to make is to trust their money with a good manager in a promising sector. And this is the main attraction of Investment Trusts. If you fancied a bet on Japan, for example, your first thought may be a straightforward fund, like Fidelity’s Japan Fund, with a 1.5 per cent annual management fee. But why might an investor instead go for an investment trust like Schroder’s ‘Japan Growth Fund Plc?’ And why does an investment fund pose as a company — with directors, plc status and its own separate stock exchange listing?

Investment trusts tend to offer great flexibility, and make it relatively easy for investors to hold their professional advisers to account. Running costs are often more reasonable than with the simpler (and more heavily advertised) funds. The flexibility comes because investment trusts manage a fixed pool of capital, often obtained in one go from investors at the time of foundation. The trust managers set out to try to make that pool of capital grow in value, by investing it as best they can. And unlike your normal fund, the assets of an investment trust are not added to, or subtracted from, every time an individual investor buys or sells.