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.
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