What makes investment trusts different from other forms of collective investment?

There are other kinds of collective investment vehicles, for example, unit trusts and open ended investment companies (OEICs). But investment trusts have several special features that make them unique.

Independent boards of directors - because an investment trust is a company listed on the stock market, it will have independent directors whose duty it is to look after your interests as a shareholder.

Closed-ended funds - shares in an investment trust are issued only once, when the trust is created. This makes investment trusts closed-ended: the number of shares the trust issues, and therefore the amount of money it raises to invest, is fixed at the start. This enables fund managers to plan ahead. Unit trusts, on the other hand, are open-ended. They expand and contract all the time as people invest in or leave the fund.

Gearing - As companies, investment trusts can borrow to purchase additional investments. This is called 'financial gearing' and allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to repay the loan and make a profit. Obviously, the more a trust borrows, the higher risk it's taking . but the greater the potential returns if markets rise. If the market drops then the investor must bear the losses in addition to the cost of the initial loan. Not all investment trusts use financial gearing and many of those that do, use it to very modest levels. Whether or not to use gearing is a decision taken by the fund manager and the board of directors. Other investment vehicles are unable to borrow to the same extent or as cheaply as investment trusts.

Different share classes - Certain types of investment trust can issue different classes of shares to meet different investors. needs depending on the demand for income or capital growth. Investment trusts that issue different kinds of shares are called split capital investment trusts. The different classes of share have varying risk levels. Other kinds of collective investment vehicles can.t offer this split structure within one fund.

Buying at a discount - If demand for a trust's shares is low, the price can fall. When the price of the shares falls below its net asset value (NAV) this is called 'trading at a discount'. This may represent a good buying opportunity. If the discount narrows, there is the potential for enhanced returns. The prices of OEICs and unit trusts are calculated depending on the value of their assets, so you can never buy them at a discount. If the share price rises above the NAV, the investment trust is trading at a 'premium'. This is rare but occurs where there is particularly high demand for an investment trust. The discount/premium is just one factor amongst many and should never be the sole reason for a purchase or sale.