investment trust

A company quoted on the London Stock Exchange which invests its shareholders' funds in the shares of other companies.

Points to note about investment trusts are:

1. They enable private investors with limited funds to get diversified share ownership and without incurring heavy dealing costs.
2. They enable investors to get exposure to markets that they may not be able to reach themselves (e.g. to emerging countries). Different trusts also have differing objectives (e.g. growth or income).
3. They enable investors who don't have the skill or inclination to invest directly in companies to get the advantage of professional fund management (although see point below 6)
4. It is easy for investors to drip-feed money into investment trusts over time by using a monthly savings plans.
5. Unlike unit trusts, investment trusts are closed end funds. That is, there is a fixed number of shares in circulation, and the price of those shares is determined like other quoted shares - by supply and demand. This means that IT shares often trade at a discount to their Net Asset value (i.e. the value of their underlying investments) and it also makes IT shares more volatile than unit trust prices.
6. ITs are actively managed funds which try to produce total returns better than the market average. However once management charges are taken into account, they often fail to meet this target. Hence the move by many investors to passive funds - trackers and index funds - which have lower charges.