investment trust

investment trust, financial organization that pools the funds of its shareholders and invests them in a diversified portfolio of securities. It differs from the mutual fund, or unit trust, which issues units representing the diversified holdings rather than shares in the company itself.

Investment trusts have a fixed amount of outstanding shares that are bought and sold in the market; the price of these shares therefore depends both on the market value of the underlying securities and on the demand for and supply of investment trust shares. In most modern investment trusts, management has complete discretion over the portfolio, subject to general charter provisions.

The English and Scottish investment trusts formed as early as 1860 are generally considered the prototype of the modern organizations, although the idea probably had its beginning with the investment trust authorized in Belgium by King William I of the Netherlands in 1822. The early American trusts copied the basic idea of diversification practiced by the British organizations but were less soundly managed. The collapse of the American stock market in 1929 brought enormous losses and many failures to the investment trusts. After a period of confusion throughout the 1930s, strong survivors and new companies became widely accepted and grew rapidly under new federal regulation, particularly the Investment Company Act of 1940.