Organization
Investors' money is pooled together from the sale of a fixed number of shares which a trust issues when it launches. The board will typically delegate responsibility to a professional fund manager to invest in the stocks and shares of a wide range of companies (more than most people could practically invest in themselves). The investment trust often has no employees, only a board of directors comprising only non-executive directors. However in recent years this has started to change, especially with the emergence of both private equity groups and commercial property trusts both of which sometimes use investment trusts as a holding vehicle.
Investment trust shares are traded on stock exchanges, like those of other public companies. The share price does not always reflect the underlying value of the share portfolio held by the investment trust. In such cases, the investment trust is referred to as trading at a discount (or premium) to NAV (net asset value).
The investment trust sector, in particular split capital investment trusts, suffered somewhat from around 2000 to 2003 after which creation of a compensation scheme resolved some problems.
One of the key differences between an investment trust and a unit trust, is that an investment trust manager is legally allowed to borrow capital to purchase shares. This leverage may increase investment gains but also increases investor risk.
Read more about this topic: Investment Trust
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