Closed-ended, and why that matters
An open-ended fund creates and cancels units as money flows in and out. An investment trust issues a fixed number of shares and then trades them on the exchange like any company. Money leaving does not force the manager to sell anything — the seller simply sells their shares to another investor.
This has one large consequence and one large advantage.
The consequence is the discount. Because the share price is set by supply and demand rather than by the net asset value, trusts routinely trade below what their holdings are worth — sometimes 10%, 20%, occasionally 50%. Buying at a discount that later narrows adds to your return; buying at a premium that reverts subtracts from it.
The advantage is that a trust can hold genuinely illiquid things — unquoted companies, infrastructure, property, forestry — without the mismatch that destroyed several open-ended property funds, which promised daily dealing on assets that take months to sell and had to suspend redemptions when everyone asked at once.
Gearing and revenue reserves
Trusts may borrow to invest, which amplifies returns in both directions. They may also retain up to 15% of income each year in a revenue reserve and use it to smooth dividends in bad years. That is why a handful of trusts hold multi-decade records of consecutive annual dividend increases — a structure open-ended funds cannot replicate.
An independent board
A trust has its own board of directors with a legal duty to shareholders, not to the fund manager. Boards have sacked underperforming managers, bought back shares to narrow discounts, and wound trusts up. That governance layer is a real, if inconsistently exercised, protection.
How you would actually trade it
Bought and sold like ordinary shares through any platform. Two numbers to check that do not exist for ordinary funds: the current discount or premium to NAV, and the trust's own recent range for it. Paying a 15% premium for an asset class you can buy elsewhere at NAV requires a specific justification.
Watch liquidity on smaller trusts — spreads can be wide, and a large order can move the price.
What goes wrong
- Discounts can widen indefinitely. "Cheap to NAV" is not a floor; it can go to 40% and stay there.
- Gearing amplifies losses in falling markets, exactly when borrowing costs may also rise.
- NAV may be an estimate. For trusts holding unquoted or infrastructure assets, the NAV is the directors' valuation, updated infrequently. The discount may be the market telling you the NAV is wrong.
- Key person risk where a trust is closely identified with one manager.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.