An investment trust is a public company like any other company except that its assets are not buildings and machinery but investments in other companies. Investors buy shares in the trusts and rely on the expertise of the fund managers to earn a good return on their investments.

There are a few restrictions on the way in which trusts can invest. No single holding can constitute more than 15 per cent of their investments. Capital gains must be reinvested in the business and not distributed to shareholders.

The structure of trusts gives them enormous flexibility. For example, they can borrow money to finance their investments, and the interest on their borrowings can be offset against tax. This is known as gearing and relies on the rate of return on the trust’s investments exceeding the cost of borrowing. If it does, the trusts profitability increases substantially; if it does not, losses multiply.

Their shares tend to trade at a discount to the net asset value. This means that the total value of their share capital is less than the value of the investments they hold. The discount is a function of supply and demand. There are normally not enough investors wanting to buy the shares to keep them trading at asset value.