Any investment trust is a limited liability company whose shares are bought and sold through the Stock Exchange in exactly the same way that shares are traded in other public companies. The assets of these trusts are shares in other listed stock market companies all around the world.

Rather like unit trusts, investment trust portfolios are spread widely, something which the individual acting on his own would find difficult to achieve. When the first investment trust was formed over 100 years ago, it had as its stated purpose 'to provide the investor of moderate means the same advantages as the large capitalists in diminishing risks . . . by spreading investment over a number of stocks'.

Investment trusts are exempt from tax on capital gains realised on their portfolio of investments.

This allows the investor to defer any liability to tax on capital gains until he sells his shares. In addition, investment trusts - unlike some other popular investment forms such as unit trusts - can borrow money to invest in assets, any appreciation of which benefits the ordinary shareholders. Investment trusts are not supposed to invest more than 15% of their assets in any one company.

In the last couple of years the investment trust industry has undergone significant change, with the managers of trusts being required to perform more actively and successfully than in the past.

By tradition, the shares of investment trusts tend to stand in the market place at a discount to the underlying value or 'asset value' of anything up to 30%. Recently the pressure on these trusts from return-conscious shareholders has led to concentration on particular and specialised fields of investment rather than on the general portfolio spreads of former times.

In theory, an investor can buy £110 of shares for £17 or £18 by buying investment trusts, but unless the market changes its view of that particular trust (in which case the shares will rise strongly) the investor may only get £17 or £18 for the £110 of underlying share value when he sells. Of course, one hopes that the assets themselves will have increased in value so that the investor's money will have increased.

Investment trusts can only be bought through brokers and anyone considering investing in them should consult their broker or other adviser first.

CCMG - 2013