Investment Trust

Definition

The term investment trust refers to a publicly-listed company that generates profits for its shareholders by investing in other publicly-listed companies.  Investment trusts are pooled money portfolios, much like a mutual fund, and typically traded on the London Stock Exchange.

Explanation

An investment trust is similar to a closed end fund, operating as a public company.  The name is a misnomer, in that it is not created by a donor like other trusts and is not recognized under the law as a trust.  These companies are formed by issuing shares from a trust, and the money generated through the sale of shares is pooled together.  A board of directors will designate a fund manager to invest the pooled funds in the stock of other companies.

The shares of the trust are traded on a stock market, which is oftentimes the London Stock Exchange.  The price paid for a share of the trust is stated in terms of a Net Asset Value, or NAV.  It is possible for shares to trade at a premium or discount to its NAV.  Some of the other features of these investments include:

  • Rights: as is the case with common stock, shareholders are entitled to vote on issues such as the appointment of members to the board of directors.
  • Retention of Income:  these trusts can retain up to 15% of the income generated annually.
  • Debt:  investment trusts can borrow money to increase returns to shareholders.  This is referred to as gearing.
  • Fees:  since these trusts only have a board of directors, their operating costs are relatively low.
  • Closed-End: the number of shares issued is fixed, thereby limiting the size and complexity of the trust.

Related Terms

pour over trust, land trust, oral trust, nominee trust