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An investment trust is a type of pooled investment. The trust typically has a portfolio of investments (such as shares, although many different types of trust exist). Its own shares are traded on the stock market.
So, someone could invest in an investment trust simply by buying its shares (or even a single share) on the market.
Such an approach can be very lucrative but it does not always go well. It depends, as with any share, on specifically what the investor buys and how much they pay for it.
Here, though, are a handful of reasons why putting money into an investment trust can be a good idea for at least some investors.
1. Professional management
Many trusts employ professional managers who make decisions about how to allocate the funds. Legendary fund managers like Jim Slater achieved excellent returns for their investors.
There are star managers in every generation that can do well even in bad markets. However, there is lots of evidence that many professional investment managers cannot even beat the market on a sustained basis.
Still, I do see the appeal of expert managers at some investment trusts. Scottish Mortgage Investment Trust (LSE: SMT) has moved up 21% in the past five years, underperforming the FTSE 100 index. Over 10 years, though, Scottish Mortgage is up 291%.
That reflects its managers’ strong focus on growth companies like Tesla and Nvidia.
2. Navigating international markets more easily
I would feel comfortable assessing Tesla or Nvidia myself as an investor. They publish information for investors in English.
Still, directly buying American shares can involve complications that do not necessarily arise when buying shares in a London-listed investment trust that owns such shares. US tax rules are one example for British investors — and can be a headache.
What if my target was not the US but, say, Japan or Argentina?
From language challenges to different accounting practices, investing abroad can be a minefield. I reckon professional fund managers specialising in a certain market will likely understand it far better than I do.
3. Diversification on a tight budget
An important risk management tool for any investor is diversification.
On a small budget that can be difficult, as minimum dealing fees can add up.
But one share of Scottish Mortgage currently costs just over £10. That in turn effectively offers a shareholder diversification thanks to the investment trust’s holdings in almost 50 different firms based in countries including the UK, US, China, Taiwan, France, and Canada.
4. Access to unlisted companies
One of those companies is SpaceX. In fact, it is the single biggest holding in Scottish Mortgage’s portfolio right now, accounting for 7.8% of the total fund.
SpaceX is a private company, so not easy to invest in directly. A small private investor with a few hundred pounds to invest is extremely unlikely to be able to buy SpaceX shares.
Often, though, such an investor can gain exposure to such unlisted businesses through putting money into an investment trust that owns a stake.
5. Some trusts sell at a discount
Some shares sell at a discount to the sum of the parts. That applies to investment trusts too.
For example, the Scottish Mortgage share price currently sells at a discount of around 10% to its net asset value.
