How Have Investment Trusts Developed Into A UK Financial Institution?

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Today investment trusts are a common feature of the UK financial institution, managing in total over £200 billion in assets. Although this is dwarfed by the £9.1 trillion in assets managed by the wider investment industry in the UK, investment trusts are an integral part of the investment network operating in the UK.

Whilst investment trusts have witnessed increased popularity since their foundation in the mid-19th century, what they are and how they operate is not common knowledge in comparison to their larger investment brothers and sisters.

What is an investment trust?

An investment trust – or referred to as investment companies or closed funds – allows you to invest or pool your money with that of external investors or corporations to gain exposure to a range of assets through a single investment. Once you invest in an investment trust, you become a shareholder in that company until you withdraw your investment.

The core idea of diversity in investments that is at the heart of investment trusts allows the risk of investing to be spread over tens or hundreds of companies in one single investment. While at the heart, this form of investing promotes protection to investment, this does not mean there is no risk attached.

Closed-ended Funds

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The unique nature of investment trusts is they are closed-ended in nature, this means that a trust will issue a fixed number of shares in the company when they are set up, thus allowing investors who have bought a share to buy or sell on the stock market. Investment trust shares are traded on the London Stock exchange.

This closed-ended design of trusts provides portfolio and trust managers with a fixed amount of funds at their disposal allowing a degree of stability and ability in pursuing long-term investment strategy.

How have they developed in the UK financial sector?

The history of investment trusts is relatively short compared to other financial investments. Investment trusts have been a presence in the UK investment sector since the mid-19th century. Introduced in the UK financial sector, to increase the access of those with modest financial backing to the stock market in much the same way of private investors, institutions and corporations with larger financial backing have. While they increased the number of people who could invest in the stock market, they were largely created as a means of funding the various schemes worldwide undertaken by the British Empire.

After the introduction of the first investment trust in the middle of the 19th century, the UK financial sector saw rapid expansion and establishment in investment trusts throughout the country. By the outbreak of the First World War in 1914, 90 investment trusts had been established – today 26 of these are still existent.

How important are investment trusts in the financial sector in the UK?

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Investment trusts provide a range of roles throughout the financial sector. One of the most prevalent is the role investment trusts play as sources of funding for businesses. They can channel funds from financial institutions and private investors through to businesses utilising the Stock Exchange. The capital which is generated through this process can be used by businesses to help them expand.

A large proportion of investment trusts will choose to invest in one specific industry or sector, for example, hi-tech industries or aeronautical, to promote technological or commercial advancements. However, while this provides significant benefits for a given sector, investing in a single industry has increased risk attached.

What are the benefits of investing with an investment trust?

There are a significant number of attractive aspects which draw investors to investment trusts.

Levels of Risk

Whilst all forms of investment have risk attached, purchasing funds in an investment trust comes with relative protection due to the nature of how they invest their shareholders capital and their internal structure. While some investment trusts focus their attention on a specific sector, investment trusts usually spread their investments over an extensive range of options, therefore minimising the risk.

Furthermore, investment trusts are structured so an independent board scrutinises and holds the trust to account to protect the funds and intentions of the shareholders. This provides a significant level of protection for investors in case of poor performing portfolio managers or internal restructures.

Long-term investments

Due to the closed-ended nature of investment trusts and the fixed amount of capital portfolio managers look after, there is no cash drag or need for external approval on trades, allowing portfolio managers to make fast-paced beneficial decisions. Furthermore, a fixed amount of capital can provide substantial growth over the long-term due to the ability to develop future investment strategies.

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