These little understood funds can be a useful addition to a portfolio and therefore it’s worth knowing a bit about them:

1. The first investment trust was the Foreign & Colonial Investment Trust, launched in 1868 and is still going today.

2. The price you pay for investment trust shares may not be the same as the value of the underlying investments.

An investment trust is known as a closed-ended fund. This means there are only a finite number of shares in issue and therefore supply and demand will affect the trust’s share price.

The value of the underlying investments is known as the Net Asset Value (NAV), and therefore if the investment trust share price itself is less than this, it is described as trading at a discount to NAV. If the share price is higher, it will be trading at a premium to NAV.

A discount may apply where the region, sector, or fund manager, is out of favour with the market; similarly a premium reflects a high demand for the investment trust shares.

3. Investment trusts can be a good way of investing in illiquid assets such as private equity or commercial property.

Since investment trusts are closed-ended and shares are traded between external parties, the fund manager does not have to sell assets to return an investors capital. Instead, the shareholder simply needs to find a new investor to purchase their shares off of them; usually facilitated by an exchange such as the London Stock Exchange.

If the underlying investments held by the investment trust are illiquid, the shareholder therefore still has the ability to sell their shares to anyone willing to buy them.

4. Investment trusts can borrow money to invest.

The ability to borrow money can significantly boost returns when a fund manager is looking to take advantage of a rising investment market, especially when interest rates are low. However, this can also amplify losses if the manager gets it wrong so something to watch out for.

5. Investment trusts are not allowed to advertise.

Which may be why you haven’t heard of them!

James Priday is Director of Strawberry Invest.