• +44 (0) 203 830 8050
  • [email protected]

Through Square Mile’s lens: Investment Trusts

14 Nov, 2023 | Return|

Square Mile recently expanded its Academy of Funds to include closed-ended investment vehicles. At launch, 18 investment trusts, representing a range of asset classes, geographies, and investment objectives, were awarded ratings by Square Mile’s analysts.

While Square Mile has always assessed investment trusts as part of its consultancy services, this is the first time that this research has been made publicly available via the Academy of Funds and formalised through Square Mile ratings.

But what exactly is an investment trust? And how has Square Mile adapted its research process to evaluate them? We explain all here.


An investment trust is a collective investment scheme which is set up as a company, so its shares can be bought and sold on the stock exchange. As a result, investors become shareholders in the company and have the right to vote on a range of issues.

Investment trusts aim to make money for their shareholders by investing in a portfolio of shares, property, or other assets, defined in their initial prospectus and investment objectives, and chosen and run by the investment manager. They are closed-ended vehicles with a structure and governance which further sets them apart from open-ended funds for four key reasons:


Investment trusts have an independent board of directors responsible, on behalf of the shareholders, for overseeing the trust's management, including the appointment or removal of key personnel like auditors and the investment managers. Shareholders can vote at the trust’s AGM, giving them a say in the trust's governance, including the composition of the board.


The NAV of an investment trust represents the total value of its underlying assets. Its share price, however, can fluctuate independently based on market supply and demand. Crucially, this may result in investment trusts trading at either a discount or premium to their NAV.


Unlike open-ended funds where all income must be distributed to investors in each accounting period, investment trusts can retain 15% of income (again in each accounting period). As a result, it is possible to pay income out of reserves at a future date to smooth out distributions to investors giving them a more stable income stream. They can also pay income out of capital gains, again giving a more visible income stream.


Finally, the investment trust structure allows for the potential deployment of gearing via various debt instruments which can amplify gains and income. However, this also comes with risks, as leverage can magnify losses.


Despite being a different form of investment product, our analysts’ qualitative processes in assessing investment trusts and companies reflects that which is applied to open-ended funds. As a result, key parts of the research process remain - such as regular face-to-face meetings with the manager or managers responsible for running the strategy. At these meetings, analysts assess a range of considerations, including the team and their environment, philosophy and process, risks, and performance profile, ESG integration and costs. They are important factors which help determine the analysts’ level of conviction in a strategy’s ability to meet their stated objective and whether it merits a rating.

The differences in an investment trust’s structure as mentioned above also fall within the scope of Square Mile’s analysis. Here’s how:

  • The board: Analysts assess board composition including independence, relevant skill set, diversity, experience, alignment with shareholders and competence.
  • Discount control mechanism: As investment trusts and companies are listed securities, which may then trade at a premium or discount depending on market sentiment towards them, Square Mile will consider the efficacy of a board’s actions to control the balance between the supply and demand of the trust’s shares.
  • Gearing: The use of gearing and its impact on potential returns and levels of risk helps determine Square Mile’s assessment of an investment trust’s expected outcome and the trajectory of potential returns.
  • Income: As at least 85% of an investment trust’s annually accrued income must be distributed to investors, analysts must assess the board’s approach to determining how and when to transfer excess income into a revenue account which can augment future dividends.

The Square Mile ratings awarded to investment trusts will mirror those that are currently given to open-ended investment funds as follows:

  • A, AA, and AAA, reflecting Square Mile’s conviction in an investment trust’s ability to deliver on its stated objectives and ability to meet investor expectations.
  • P+ (Positive Prospect), awarded to investment trusts which the analysts consider as having the potential to be highly compelling propositions, but where there are some elements relating to the strategy that the analysts need more time to assess to be satisfied they merit a full rating.
  • Responsible ratings, awarded to investment trusts with a responsible outcome or target incorporated into their objectives or mandate. They follow the same gradations (A, AA, AAA and P+) to express the analysts’ confidence in a manager's ability to meet their objectives with an additional assessment of the potential of meeting the trust’s responsible investment objective.

Above all, Square Mile's research process focuses on helping advisers and fund selectors evaluate the complexities of investment trusts, considering their structural advantages and long-term performance potential while also acknowledging the associated risks. As investment markets continue to evolve, investment trusts are likely to play a crucial role in democratising access to less liquid assets like private and infrastructure investments, making them an important area of research and analysis. The Square Mile ratings will help advisers and fund selectors make more informed decisions over which strategies are compelling propositions in this area, with the list of rated trusts set to expand over the coming months.

Take a look at Square Mile’s rated Investment Trusts.


Comparing investment trusts with open-ended vehicles

Open-ended investment vehicles and closed-ended vehicles have distinct structures. Neither structure...

Read More >

Investment Trust Discounts and Premiums

As Square Mile now includes a number of investment trusts in its Academy of Funds, with more to foll...

Read More >

The Importance of Board Structure for Investment Trusts

Investment trusts are a form of closed-ended vehicle. As such, they differ from open-ended funds in ...

Read More >