What is an Investment Trust?
Updated: Sep 19
An investment trust acts like a mutual fund and an ETF at the same time, which makes it popular among both small and large investors alike. It’s considered to be more stable than its counterparts because of its fixed structure, which means your money is always secure, regardless of the market conditions outside of your control.
If you want to take advantage of this unique opportunity, keep reading to learn more about investment trusts in general as well as how they differ from other options in the market today.
A Brief History of Investment Trusts
Although they may not be as popular today, investment trusts have a long history in finance. In fact, modern investment trusts actually evolved from a trust created by railroad magnate, George Jay Gould I.
In 1882, he formed a holding company known as Grant & Ward that issued certificates of ownership in each of his investments.
He sold 1/5th of his shares to investors and reinvested all other profits back into his companies. By 1886, he owned 85% of Union Pacific Railroad and 90% of Western Union telegraph Company.
Once it was discovered that he had bilked investors out of $7 million (about $150 million in today’s currency), it resulted in one of Wall Street’s first major scandals and ultimately led to his bankruptcy in 1892.
How Do They Work?
An investment trust works just like a traditional mutual fund. But instead of shares being traded on a public exchange, they’re privately held within your brokerage account.
The key here is that you don’t have to worry about fees taking a bite out of your profits; because it's private, there are far fewer regulations.
And, because it’s private and investors are limited in how many trusts they can own, competition—and thus profit margins—are less fierce than they would be with a public fund.
For these reasons and more, investors have flocked to investment trusts over mutual funds in recent years.
Types of Investment Trusts
There are two primary types of investment trusts: open-ended and closed-ended. Open-ended investment trusts (OEICs) are also known as unit trusts or collective investment schemes.
These types of investment trusts sell shares continuously, in order to raise money for investing, as well as making them available to investors at any time.
OEICs are always listed on a stock exchange; when you buy shares in one, you do so through a broker and they’re held on your behalf by your account manager or fund supermarket.
They pay dividends semi-annually in March and September, and they can be traded freely on an exchange during market hours every day.
Are They Suitable For My Risk Profile and Goals?
Before you decide to invest in an investment trust, it’s important to evaluate your overall financial situation.
Many investment trusts carry a high level of risk and are more likely to be appropriate for long-term investors than for those looking for short-term gains.
They also tend to carry slightly higher expense ratios than exchange-traded funds, due to additional costs involved with managing such vehicles.
Therefore, it’s crucial that you have a solid understanding of your goals and comfort level before purchasing shares of an investment trust. Remember: If in doubt, always seek out professional financial advice.
Are There Any Hidden Costs or Fees I Should Know About?
Not all investment trusts are created equal. Be sure to read through your trust's prospectus to understand what fees and charges you might have to pay. Paying attention to these details can help keep your long-term costs from spiraling out of control.
And when it comes time to pull cash out of your trust, be aware that some can charge hefty redemption fees if you try to sell out too soon.
What is an Investment Trust - The Bottom Line
The number of investment trusts listed on a major exchange has declined steadily over recent years, from over 500 in 1995 to less than 130 today.
Not many people know about them, but they can be very useful if you’re looking for low-cost exposure to stocks from different sectors.
With no minimum investment requirements and few fees to worry about, some would argue that these are your best option for growing wealth over time.