Investment Trusts: A Strategic Pillar for Long-Term Portfolios?
Lee Salter · Posted on: February 4th 2026 · read
In an era of market volatility and shifting interest rates, investors are increasingly looking beyond traditional open-ended funds toward structures that offer resilience, income consistency, and unique growth opportunities.
Investment trusts, some of which have been operating for over 150 years, are often described as the "hidden gems" of the UK investment landscape.
But what makes them distinct from more common investment vehicles, and how do they fit into a modern wealth management strategy?
The Structural Difference: Closed-Ended vs. Open-Ended
To understand investment trusts, one must first understand their structure. Unlike Unit Trusts or Open-Ended Investment Companies (OEICs), an investment trust is a public limited company (PLC) listed on the London Stock Exchange.
Because they are "closed-ended," they have a fixed number of shares. If you want to invest, you buy shares from another investor on the secondary market; if you want to exit, you sell them. This differs from open-ended funds, where the fund manager must create or cancel units to meet investor demand.
This structural nuance provides the fund manager with a significant advantage: they do not have to sell underlying assets to meet sudden redemptions during a market downturn, allowing for a truly long-term investment horizon.
Key Features of Investment Trusts
1. Dividend Smoothing
2. Gearing for Growth
3. Trading at a Discount or Premium
4. Independent Board Oversight
Dividend Smoothing
Perhaps the most attractive feature for income-seeking investors is the ability to "smooth" dividends. Unlike open-ended funds, which must distribute all net income generated each year, investment trusts can withhold up to 15% of their annual income in a "revenue reserve." During leaner years, the trust can dip into these reserves to maintain or even increase dividend payouts, providing a level of consistency that is rare in direct equity investing.
Gearing for Growth
Investment trusts have the power to borrow money to make additional investments—a process known as "gearing." While this can magnify losses in a falling market, it can significantly enhance capital growth and income in a rising market. It is a tool that, when used prudently by an experienced manager, provides a performance lever unavailable to most open-ended structures.
Trading at a Discount or Premium
Because investment trust shares are traded on the stock exchange, their share price is determined by supply and demand, rather than solely by the value of the underlying assets (the Net Asset Value, or NAV).
• Discount: When the share price is lower than the NAV.
• Premium: When the share price is higher than the NAV. Strategic investors often look for high-quality trusts trading at a discount, offering the potential for "alpha" if the gap between the share price and the asset value narrows.Independent Board Oversight
Every investment trust is governed by an independent Board of Directors. Their primary duty is to represent the interests of the shareholders, not the fund management house. This adds an extra layer of corporate governance, as the Board has the power to change the fund manager if performance is consistently poor.
Accessing Niche and Illiquid Markets
The closed-ended nature of investment trusts makes them the ideal vehicle for investing in "illiquid" assets—things that cannot be sold instantly, such as:
- Commercial Property
- Private Equity and Venture Capital
- Infrastructure projects (Renewables, Social Housing)
- Physical Assets (Aircraft leasing, Shipping)
In an open-ended fund, a rush of withdrawals can force a "fire sale" of these assets. In a trust, the manager can stay invested in the asset regardless of market sentiment, as the shares change hands without affecting the fund’s underlying capital.
Planning Considerations
"While investment trusts offer numerous advantages, they are not without risk. The use of gearing and the potential for share price volatility (discounts widening) means they may carry a different risk profile than a standard tracker fund."
Furthermore, the tax treatment of investment trusts within a portfolio—particularly when held within an ISA or SIPP—requires careful consideration to ensure they align with your broader inheritance tax (IHT) and capital gains tax (CGT) planning.
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Contact the teamMHA Wealth Disclaimer
Critical Disclosure: The value of investments and the income from them can fall as well as rise, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. Investment trusts can borrow money to invest (gearing), which can magnify gains and losses.
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MHA Wealth is authorised and regulated by the Financial Conduct Authority (FCA) with registered number 143715 and is a member of the London Stock Exchange.
This is a marketing communication for general information only and is not intended to be individual investment advice, tax or legal advice. The views expressed in this article are those of MHA Wealth, or its staff, and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. You are therefore recommended to seek professional regulated advice before taking any action.
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
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