Investment trusts are one of the UK’s best‑kept investing secrets. They’ve been around for over 150 years, charge lower fees than most funds, and can trade at a discount to the value of their underlying assets. Here’s everything you need to know.
What Is an Investment Trust?
An investment trust is a publicly listed company on the London Stock Exchange (LSE) whose sole purpose is to invest in other companies’ shares, bonds or assets. Unlike open‑ended funds (such as OEICs or unit trusts), investment trusts have a fixed number of shares in issue. This closed‑end structure means they can trade at a premium or discount to their net asset value (NAV).
Because the shares trade on the stock exchange like any ordinary share, you can buy and sell throughout the trading day. The price is set by the market, not by the underlying asset value, which creates the premium and discount opportunity described below.
Why Investment Trusts Are Worth Considering
Investment trusts offer several advantages over other types of funds:
- Diversification — A single trust can hold dozens or even hundreds of different investments, spreading your risk across companies, sectors and geographies.
- Professional management — An experienced fund manager selects and monitors the portfolio on your behalf.
- Gearing (leverage) — Investment trusts are the only funds permitted to borrow money to invest, which can amplify returns when markets rise. Gearing adds risk, so it cuts both ways.
- Long track record — Many investment trusts have operated continuously for 50, 60 or even 100 years. This gives you a proven history of performance across multiple market cycles.
- Regular dividends — Many trusts pay reliable, growing dividends. Some trusts aim to increase dividends every year regardless of market conditions.
- Closed‑end structure — The fixed share count means the manager is never forced to sell assets to meet investor redemptions, allowing a truly long‑term approach.
- Discount to NAV — You can sometimes buy a trust at 5–15% below the value of its underlying assets, giving you an instant boost to your investment.
Best Global Investment Trusts
These trusts invest in companies across the world, giving you broad international diversification in a single holding.
Alliance Trust (ATST)
Alliance Trust has been investing since 1888. It holds a diversified portfolio of global equities managed by a team of specialist stock pickers. The trust has a strong long‑term track record and aims to grow both capital and income. Its ongoing charge is around 0.55%, competitive for a globally diversified trust.
Scottish Mortgage Investment Trust (SMT)
Scottish Mortgage is the UK’s largest investment trust, with over £14 billion in assets. Managed by Baillie Gifford, it takes a long‑term, growth‑focused approach with heavy exposure to technology and innovation companies. It has dramatically outperformed the FTSE All‑World index over the past decade, though its concentration in growth stocks means it can be more volatile than other trusts.
Witan Investment Trust (WTAN)
Witan uses multiple fund managers to run different parts of its portfolio, giving you exposure to several investment styles within one trust. It has a strong income record and aims to grow dividends ahead of inflation. Witan has a long history of performance and is often recommended as a core holding for UK investors.
Best UK Equity Income Trusts
These trusts focus on generating dividend income from UK‑listed companies, making them popular with retirees and income‑focused investors.
City of London Investment Trust (CTY)
City of London is the largest UK equity income trust and has increased its dividend every year for over 55 consecutive years. Managed by Janus Henderson, it holds a diversified portfolio of FTSE‑listed blue chips. The yield is typically around 3.5–4.5%, and the trust trades at a modest discount to NAV.
Scottish American Investment Trust (SCAM)
Despite its unusual ticker symbol, Scottish American is a serious income trust focused on UK equities with international revenue streams. It benefits from companies that earn a large share of their profits overseas, providing both dividend growth and currency diversification.
Merchants Trust (MGNT)
Merchants Trust has a 50+ year track record of dividend growth. It invests in UK equities and targets above‑average dividend yields. The trust is managed by abrdn and often trades at a discount to NAV, making it a strong value pick for income investors.
Best Sector Investment Trusts
Sector trusts give you focused exposure to a specific area of the market. They carry higher risk than diversified trusts but offer the potential for above‑average returns.
Biotech Capital (BPC)
Biotech Capital invests in smaller and mid‑sized biotechnology and life sciences companies. The biotech sector is volatile but offers strong growth potential as new drugs and treatments come to market. This trust is suitable only for investors comfortable with high risk.
Pacific Assets Trust (PAC)
Pacific Assets invests in equities across the Asia‑Pacific region, including Japan, China, India and Southeast Asia. It provides exposure to some of the world’s fastest‑growing economies, though political and currency risks are higher than with UK or US‑focused trusts.
Herald Investment Trust (HRI)
Herald invests in smaller UK and global technology, media and telecommunications (TMT) companies. It has delivered exceptional long‑term returns but can be volatile, making it a higher‑risk choice suited to investors with a long time horizon.
Premium and Discount Explained
Because investment trusts trade on the stock exchange, their share price can diverge from the net asset value (NAV) of the underlying holdings.
- Discount — The share price is below NAV. A 10% discount means you can buy £100 of assets for £90. This is a potential value opportunity.
- Premium — The share price is above NAV. A 10% premium means you are paying £110 for £100 of assets. This may indicate strong demand or expected future growth.
Discounts and premiums fluctuate based on market sentiment, trust performance, and manager reputation. Historically, buying trusts at wide discounts has been a profitable strategy. Many trusts also use buybacks to narrow discounts, returning value to shareholders.
You can track current discounts and premiums on the Association of Investment Companies (AIC) website.
Fees
Investment trusts charge a management fee, typically between 0.4% and 1% of net assets per year. Some trusts also charge a performance fee if they outperform a benchmark, though this is becoming less common.
Compared to many unit trusts and OEICs, which can charge 1–1.5%, investment trusts are generally cheaper. The total expense ratio (TER) for most trusts is competitive, and larger trusts like Scottish Mortgage and City of London operate at the lower end of the fee range.
Over a 20‑year period, a 0.5% difference in fees on a £50,000 investment can cost you over £5,000 in lost returns. Always check the fees before investing.
Tax on Investment Trusts
Investment trust shares are taxed the same way as any other shares held outside a tax wrapper:
- Dividends — Taxed as income at your marginal rate. Basic‑rate taxpayers pay 8.75%, higher‑rate taxpayers pay 33.75%, and additional‑rate taxpayers pay 39.35%.
- Capital gains — Profits on disposal are subject to capital gains tax (CGT). The annual CGT exempt amount is £3,000.
- ISA — Dividends and gains inside a Stocks and Shares ISA are completely tax‑free. This is the most tax‑efficient way to hold investment trusts.
- Special dividends — Some trusts pay special or supplemental dividends, which are taxed in the same way as ordinary dividends.
Using a Stocks and Shares ISA eliminates all tax on dividends and gains, making it the best way to hold investment trusts for most investors.
How to Buy Investment Trusts
You can buy investment trust shares through any UK share‑dealing platform, typically inside a Stocks and Shares ISA for tax efficiency. The main options are:
| Platform | Annual Fee | Stock Trading Fee | Notes |
|---|---|---|---|
| Hargreaves Lansdown | 0.45% | £11.95 | Largest UK platform, wide range of tools |
| AJ Bell | 0.25% | £9.95 | Lower platform fee, good for larger portfolios |
| Interactive Investor | £3.99/month | £5.99 | Fixed monthly fee suits larger portfolios |
| Vanguard | 0.15% | N/A | Only offers Vanguard‑branded investment trusts |
Most platforms allow you to set up regular monthly investments, often at reduced dealing fees.
Steps to Buy
- Open a Stocks and Shares ISA or general investment account with your chosen platform.
- Search for the investment trust by name or ticker (e.g., CTY for City of London, SMT for Scottish Mortgage).
- Choose how many shares to buy, or enter a cash amount and the platform will calculate the number of shares.
- Place the order — it will execute during market hours.
- Monitor your holdings periodically, but avoid the temptation to trade frequently.
Worked Example: City of London Investment Trust
Let’s say you invest £10,000 in City of London Investment Trust (CTY) when it is trading at a 5% discount to NAV.
- NAV per share: £5.00
- Market price: £4.75 (5% discount)
- Shares purchased: 2,105 shares (£10,000 ÷ £4.75)
- Underlying asset value: £10,525 (2,105 × £5.00 NAV)
- Instant value boost: £525 from buying at a discount
City of London typically pays a dividend yield of around 4%. Your annual income would be:
- Dividend income: £400 per year (£10,000 × 4%)
- Tax inside ISA: £0
- Net income: £400 per year, completely tax‑free
Over 10 years, assuming dividends are reinvested and the trust maintains a 7% total return, your £10,000 could grow to approximately £19,700 — all inside a tax‑free ISA.
Tips for Investing in Investment Trusts
- Buy at a discount — A wider discount to NAV gives you better value. Check the AIC website for current discount data.
- Check the long‑term track record — Look at 10‑year and 20‑year performance, not just recent returns. A long history of growing dividends is a strong sign.
- Diversify across trusts — Don’t put all your money in one trust. Consider mixing global, UK income and sector trusts.
- Use an ISA — Hold investment trusts inside a Stocks and Shares ISA to avoid dividend tax and capital gains tax.
- Check the gearing level — Some trusts use gearing to boost returns. Higher gearing means higher risk. Check the trust’s annual report for the gearing percentage.
- Review annual reports — Read the annual report and manager’s commentary to understand the trust’s strategy, holdings and costs.
- Don’t overtrade — Investment trusts are long‑term holdings. Buying and selling frequently increases costs and reduces returns.
- Consider the premium or discount trend — A trust trading at a persistent premium is in demand; a trust at a persistent discount may be out of favour but could be undervalued.