UK Investment Trusts Explained: A Hidden Gem for Investors
Investment trusts are one of the oldest and most versatile investment vehicles in the UK. Here's why they deserve a place in your portfolio.
The Overlooked Investment Vehicle
Investment trusts are one of the UK's oldest and most versatile investment vehicles, yet they are frequently overlooked by beginner investors in favour of unit trusts and ETFs. This is a missed opportunity. Investment trusts offer several unique structural advantages that make them particularly powerful for income investors and those seeking access to assets not available through conventional funds.
What Is an Investment Trust?
An investment trust is a publicly listed company whose business is investing in a portfolio of other assets — shares, bonds, property, private equity, infrastructure, or combinations of the above. Unlike unit trusts or OEICs, which are open-ended — creating new units when investors buy and cancelling units when they sell — investment trusts are closed-ended. They issue a fixed number of shares at launch and these shares trade on the London Stock Exchange just like any other listed company's shares.
Premium and Discount to NAV
Because investment trust shares trade on the open market, their price may differ from the underlying value of the assets held — the Net Asset Value or NAV. When investor demand is high and the trust's share price exceeds its NAV, it trades at a premium. When demand is weak and the share price falls below the NAV, it trades at a discount. Buying a quality investment trust at a discount to NAV can represent exceptional value — you are effectively buying £1 of assets for less than £1.
The Dividend Smoothing Advantage
One of investment trusts' most valuable structural features is their ability to retain up to 15 per cent of income received in any year and carry it forward to boost dividends in future years when underlying income may be lower. This allows investment trust boards to smooth their dividend payments through economic cycles — paying a stable or growing dividend even in years when their underlying holdings cut dividends. No unit trust or ETF has this capability.
This is why the UK has numerous investment trusts with extraordinary dividend growth records. The Association of Investment Companies maintains a Dividend Heroes list of trusts that have increased their dividends for 20 or more consecutive years. City of London Investment Trust has grown its dividend for over 57 consecutive years. Scottish American Investment Company (SAINTS) has increased its dividend for over 50 years. These are remarkable records of income resilience through multiple recessions and crises.
Gearing: A Double-Edged Sword
Investment trusts can borrow money to invest — a practice known as gearing. When markets are rising, gearing amplifies returns. When markets are falling, gearing amplifies losses. Responsible use of modest gearing — say 10 to 15 per cent — by skilled managers in suitable market conditions can enhance long-term returns. However, excessive gearing in falling markets can cause severe losses. Always check a trust's gearing level before investing, particularly if you have a lower risk tolerance.
Popular UK Investment Trusts
Scottish Mortgage Investment Trust (SMT) managed by Baillie Gifford is one of the largest and most well-known trusts, focusing on high-growth technology and innovation companies globally. City of London Investment Trust focuses on UK and international income-paying equities. Personal Assets Trust aims to protect and grow wealth in real terms with a conservative, multi-asset approach. Monks Investment Trust offers global growth exposure with a long-term perspective. Murray International Trust provides global income with a focus on Asian and emerging market equities.
How to Buy Investment Trusts
Investment trusts are bought and sold like shares on the London Stock Exchange through any UK brokerage or investment platform. Hargreaves Lansdown, AJ Bell, and Interactive Investor all offer access to hundreds of investment trusts. They can be held in a Stocks and Shares ISA or SIPP. The dealing fee is the same as for shares — typically £5 to £12 per trade depending on your platform. There is no equivalent of the regular investment option available for unit trusts; you buy investment trust shares at the prevailing market price.
