Investment trust share holders often invest because they believe trusts will outperform similar 'open-ended' funds such as unit trusts and Oeics (open ended investment companies).
When investment trusts do out-perform their open-ended rivals, as they frequently have in the past, it can sometimes be explained by a combination of lower costs (although that advantage has narrowed in the last few years), the closed-ended structure of the trust and the effect of 'gearing'.
Here, we explain the impact of these factors on performance.
Find out more: What is an investment trust? - for more on the differences between open and closed-ended funds
Investment trust costs
Traditionally, investment trusts have had lower ongoing charges than open-ended unit trusts and Oeics. This was in large part because unlike open-ended funds, investment trusts have never paid commission to financial advisers.
And because investment trusts don't have to deal with money coming in and out, there's less administration to pay for. In addition, investment trusts have independent boards of directors representing the interests of the shareholders - as such they will often negotiate lower annual charges as trusts grow.
However, as a result of the Financial Conduct Authority's Retail Distribution Review (RDR), open-ended funds have become cheaper.
Those who buy funds through a financial adviser have been benefiting from so-called 'clean units' with ongoing charges of between 0.75% and 1% since 2013 - the financial advice is now paid for separately, by fee. Those who buy open-ended funds through fund supermarkets have been benefiting from clean units since April 2014. Cheaper open-ended funds could represent a challenge to investment trusts' traditional advantage of fees.
When considering investment trusts, it's also necessary to consider that, like any other shares, but unlike open-ended funds, your deals will be subject to stockbroking commission.
Find out more: Are fund charges eating into your returns? - find out more about the impact of fees on performance
Investment trusts and the closed-ended structure
Because investment trusts have a limited and constant number of shares, and are governed by a board of directors, they can arguable take a more genuine long-term view than their open-ended counterparts. They don't have to buy or sell the underlying investments until the board really thinks it's the best time to do so.
With open-ended funds on the other hand, fund managers have to buy and sell shares to accommodate investors joining and leaving the fund. This can mean managers might be forced to transact at inopportune times - selling when the market is low and buying when it's high, for example.
According to research by the Association of Investment Companies (AIC) - whose purpose is admittedly to promote investment trusts and therefore should be taken with a grain of salt - closed-ended funds have delivered growth of about 550% since 1995, while comparable open-ended funds have delivered just under 300% over the same period.
Of course, as every investment professional is duty-bound to tell you, past performance is definitely not an indicator of future returns. And not only that, but if markets are going up then that's good for investment companies because of gearing - which leads us nicely into our next point.
Dividends can play a powerful role in generating an income from investment trusts. Use our dividend tax calculator to find out how much you'll pay in 2017-18.
Investment trusts and gearing
Another major difference between investment and unit trusts is that investment trusts can borrow money to invest. This ability (known as gearing) can have a dramatic effect on the value of your investments.
Investment trusts use this borrowed money to invest in shares and other securities. Gearing is very useful when markets are rising as it magnifies any gains you make.
However, when stock markets are falling, gearing will heighten your losses. A trust with a high level of gearing will likely fall further under these circumstances than trusts with low gearing.
This means the more borrowing a trust has, the greater the capital risk you face, but you also have the potential for higher returns. The combined effect of gearing and the discount means investment trusts are likely to be more volatile than equivalent unit trusts.
This means if you invest in investment trusts you should be prepared for a rockier road with bigger ups and downs.
But not all investment trusts gear. The AIC publishes details of each trusts gearing policy - a gearing rating of 100 means the trust has no borrowing, a rating of 110 means your gains or losses will be magnified by 10%, etc - in other words, the trust has gearing of 10% of total assets.