Three types of investment funds

Investment trusts, ETFs, and OEICs are the main fund types. Each works differently and suits different investing goals.

How investment trusts work

Investment trusts have a fixed number of shares listed on the stock market. You buy from and sell to other investors, not the fund manager, so trades don't affect the trust's capital.

OEICs and ETFs differ

OEICs are open-ended and unlisted, so the manager creates or cancels shares as you invest or withdraw. ETFs are listed but also open-ended, with institutional traders creating and redeeming shares directly with the manager.

Permanent capital is powerful

Because investment trust shares don't affect the fund's capital, managers can invest in illiquid assets like infrastructure, private equity, real estate, and small caps that need long-term holding.

Discount and premium opportunities

Investment trust shares trade at market price, which can be above or below net asset value. If you buy at a discount, gains amplify when the discount shrinks. ETFs and OEICs always trade near NAV.

Gearing boosts returns

Investment trusts can borrow up to a limit, often 20%, to buy more assets. This gearing amplifies gains in good times but also amplifies losses, so it's a tool for experienced investors.

Buybacks and dividend smoothing

Trusts can buy back shares below their value to close discounts and create value for remaining shareholders. They can also hold back income to keep dividends steady through market cycles.

Governance gives investors control

Investment trusts are listed companies with boards protecting shareholder interests. Shareholders can replace managers, vote to wind up the trust, or take back capital if performance is weak.

“It is a very different relationship with investors compared to OEICs and, in MoneyWeek's view, a solid basis for building wealth.”