While equity markets stuttered in July – the MSCI World Index, which represents 85% of the total market capitalisation of each developed market in the world, grew just 0.5% during the month – flows into exchange-traded products were strong.

European-listed exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) attracted flows of €47.3 billion in July, up 28.5% from €36.8 billion the previous month, according to data from investment research firm Morningstar.

Fund flows can give a broad indication of how investors feel about the market at a given point of time, though there is of course no guarantee that this will continue in future.

Among European-listed ETFs, those focusing on equity investing attracted €34.2 billion in flows during July, up from €29.9 billion in June. ETFs tracking bonds attracted €8.8 billion in July, up from €7.7 billion in June.

“Despite a softer month for US equities, money continued to flow into both global and US-focused equity [ETFs], reflecting investor conviction in the long-term artificial intelligence and technology-led growth story,” said Jose Garcia-Zarate, senior principal at Morningstar. “Investors largely treated market weakness as a buying opportunity, continuing to allocate capital to growth-oriented exposures.”

While ETF flows remained strong in aggregate, there was some divergence between the allocations towards different styles of fund.

The Europe-listed ETF sectors that saw the biggest inflows and outflows

Blend equity ETFs (those holding a combination of value and growth stocks) saw some of the largest inflows among Europe-listed equity ETFs during July, according to Morningstar’s analysis.

Global large cap blend equity ETFs attracted €10.1 billion in flows during the month, followed by US large cap blend equity at €8.6 billion.

While ETFs that contained a blend of US large- and small-caps saw the largest flows, their counterparts that focused on either growth or value saw divergent flows. ETFs targeting US large cap growth stocks were among those that saw the largest outflows (€1.4 billion worth), but US large cap value ETFs saw outflows of €117 million.

^{Source: Morningstar Direct. Data as of 31 July 2026.}

“Interestingly, we saw little evidence of a meaningful rotation into defensive or value strategies during the pullback,” said Garcia-Zarate.

The ETF sectors that saw the largest outflows were global large cap value, which saw outflows of €539 million, and Europe ex-UK with €442 million in outflows.

Which Europe-listed ETFs saw the largest flows during July?

Vanguard’s FTSE All-World UCITS ETF (LON:VWRP) topped the list of ETFs seeing the largest inflows during July, with €3.3 billion flowing into the fund. iShares MSCI Japan ETF (LON:IJPN) came second, with €1.6 billion inflows.

State Street SPDR MSCI World ETF (LON:SWLD) saw the largest outflows, at €1.9 billion, followed by Xtrackers S&P 500 Swap ETF (LON:XSXG) which registered €981 million outflows.

^{Source: Morningstar Direct. Data as of 31 July 2026.}

What happened to global ETP flows in July?

The data on flows into European-listed ETFs and ETCs was consistent with the picture that global ETP flows painted.

Global flows into exchange-traded products (ETPs) – which includes ETFs and ETCs – hit a record $362.6 billion in July, according to data from asset manager BlackRock.

BlackRock’s analysis showed that flows into equity ETPs rose for the third consecutive month to $64.8 billion.

Tech-focused ETPs saw higher flows than any other sector. Flows into tech ETPs reached a record $60.5 billion in July, smashing through the previous record of $32.0 billion, set the previous month.

Retail investors were in a buoyant mood early in the summer as new figures show they poured £3.8 billion into investment funds during June, the highest monthly total since August 2021.

The data from The Investment Association (IA) – an industry body representing the UK’s investment managers – showed that retail investors allocated £12.3 billion into funds during the first six months of the year.

June’s positive fund flows marked the eighth consecutive month of net fund inflows.

While the annual totals suggest that investors were willing to invest, there is evidence that resilience and defensiveness were top of mind.

“Investors have shown resilience by staying invested in the markets, shifting their portfolios to lower-risk strategies, with bonds, diversified mixed assets and cash-like assets leading the way,” said Miranda Seath, director of market insight and fund sectors at the IA.

Fixed income strategies saw monthly inflows of £2.3 billion, the highest monthly figure since January 2021 and up 53% from £1.5 billion in May 2026. Within fixed income strategies, funds focused on government bonds saw the largest inflow, at £674 million during June.

Despite a Memorandum of Understanding between the US and Iran alleviating pressure on oil prices and calming inflation expectations for much of the month, investors allocated their money cautiously and equity funds saw net outflows of £1.1 billion. This was, however, an improvement on the £1.5 billion outflows that occurred in May.

Where were fund flows concentrated in the first half of 2026?

Across the first six months of 2026, equity funds saw total outflows of £7 billion – though, again, this marks a slowing of outflows compared to the £14.3 billion that fled the sector in the second half (H2) of 2025.

Fittingly given the volatile year that US stocks have had, net monthly flows to the North America sector fluctuated between inflows and outflows each month during H1, but it was the only IA equity sector to end the period in positive territory, with inflows of £1.7 billion.

Seath attributed this flip-flopping to investor unease and uncertainties relating to artificial intelligence (AI).

The North American Smaller Companies sector saw its first month of inflows this year during June, bringing in a net £181 million.

Half-yearly outflows from UK-focused funds fell to their lowest level since 2021 – with £3.1 billion leaving these funds in H1 2026 compared to £4.8 billion in H2 2025.

This moderation in UK equity outflows follows a strong 2025 for UK stocks, said Seath.

“Investors may be taking advantage of a more defensive market composition in the face of broader uncertainty,” she added. “The UK market has relatively high exposure to 'halo' sectors, those with heavy assets and low obsolescence, such as mining and energy, which are often viewed as more resilient during periods of uncertainty and offer a counter trade to investments in AI and tech stocks helping to diversify portfolios.”

Funds focused on Asian equities, though, saw outflows of £1.6 billion during H1. Certain Asian markets are highly exposed to the volatility of certain parts of the AI infrastructure industry.

“Emerging markets chip manufacturers have become key players in the global AI value chain, driving strong performance but also creating potential new concentration risks in markets including South Korea,” said Seath.

Did active or passive funds see the biggest fund flows in the first half of 2026?

Fund flows are a good way to see what investors are backing in the active versus passive debate. The data from H1 2026 shows passive strategies are overwhelmingly more popular.

Tracker funds saw inflows of £9.7 billion in the first half of the year – their strongest half-year since 2024.

Most of this demand came from equity tracker funds, which saw inflows of £6.8 billion.

Actively managed equity funds, by contrast, saw outflows of £13.9 billion during the first half of the year.

In bad news for sustainable investments, responsible investment funds also saw outflows of £2.7 billion across H1, with outflows from SDR-labelled funds shedding £1.9 billion.

Marcel Stötzel, lead manager of the Fidelity European Trust (LSE: FEV), isn’t deterred by claims that Europe’s economic record and outlook are just as dismal as the UK’s.

“Europe is plagued by poor demographics, low productivity and high government debt, none of which are getting any better,” he agrees. Economic output per capita is half the level of the US. But European stocks are not proxies for their economies, as they derive only a third of their turnover from Europe. “We are more bullish than ever.”

Meanwhile, on the macro front, he sees five reasons to be positive. “Germany's fiscal brake has been lifted, Mario Draghi's report on EU competitiveness promises to cut red tape, there is a large savings rate to be mobilised, Europe is spending more on defence and European integration is tightening.” As a result, “the GDP growth gap will not continue to widen” and “we are overweight domestic Europe for the first time.”

A disappointing year for Fidelity European Trust

Following its merger with Henderson European Trust nearly a year ago, Fidelity European Trust has become a £2.2 billion investment trust. It trades at a modest 5% discount to net asset value (NAV) and yields 2.3%. However, while performance has been excellent since its 1991 launch (13.2% per year against 9.5% for the FTSE Europe ex-UK index), it has lagged the index by 10% over one year, 13% over three, and 12% over five. This puts it 11%, 31% and 33% respectively behind JP Morgan European Growth & Income (LSE: JEGI).

In the latest annual report, Sam Morse, fellow portfolio manager, attributed last year's disappointing performance to “limited exposure to defence stocks, holdings in Novo Nordisk, chemical producer Symrise and software company SAP”. Novo Nordisk soared on the back of its weight-loss drug Wegovy, but then crashed 75% from its mid 2024 high before a slight recent recovery. SAP has suffered from concerns that AI will disrupt the businesses of established software companies. JP Morgan European Growth & Income had been more nimble, selling SAP early last year and Novo Nordisk the year before.

Still, every manager has a bad year, and Stötzel will surely get performance back on the rails again, maintaining the long-term record. He focuses on “companies with the ability to grow dividends sustainably for three-five years.” Examples include Inditex, owner of the Zara chain, which kept manufacturing at home and in North America instead of outsourcing it to China. This has enabled better quality control, less wastage, faster delivery and more flexibility.

Other top holdings include ASML, with a virtual global monopoly in the supply of machines for manufacturing semi-conductor chips, pharmaceutical company Roche, cosmetics giant L'Oréal and oil and gas producer TotalEnergies.

Should you invest in Fidelity European Trust?

Stötzel says the portfolio has a higher return on capital and better dividend growth than the market, while trading at no more than the historic valuation of 18 times earnings. Overall, European equities are no better than fair value, but if Stötzel is right and economic growth picks up, earnings growth should accelerate and investment returns continue to be strong. There would be a further boost if the historic aversion of Europeans to investing in equities abates.

Stötzel's thesis about the improving economic outlook for Europe relative to the US may prove optimistic, but it is more plausible than any thesis for the UK, to whose market investors continue to be patriotically attached. Europe is a much larger and broader market than the UK with many more growth stocks, offering managers a better choice for long-term investment. Fidelity European Trust may have tripped up last year, but it has a great long-term record, while investors in JP Morgan European Growth & Income must hope that pride doesn't come before a fall.

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When looking to buy a debt fund, investment trusts are the perfect vehicle. Their closed-ended structure means they are ideal for owning complex and less-liquid debt. It gives them permanent capital, allowing them to hold assets that would be impossible for any open-ended fund that needs to be able to buy and sell quickly in response to inflows and redemptions.

There are a number of specialist trusts that allow UK private investors to access areas that would usually be available only to institutional and high-net-worth investors. What's more, shares in the trusts can be traded at any time regardless of the liquidity of the underlying assets. This means that investors are not subject to the risk of “gating” – limitation or suspension of withdrawals when redemption requests are high – that affects the vehicles these investors typically use.

Why debt funds are highly misunderstood

Despite these strengths, debt funds make up one of the most misunderstood segments of the investment trust sector. There are 16 trusts with total capitalisation of £5.2 billion, split across three sub-sectors: direct lending, loans and bonds, and structured finance.

The average dividend yield today sits in the region of 10%, which in part reflects the fact that the majority of trusts are trading at double-digit discounts to net asset value (NAV). This reflects a lack of awareness of these vehicles, as well as worries around the global private credit market.

For the most part, concerns about the impact of high-profile private credit wobbles are overdone, since most of these debt funds do not own the type of debt under scrutiny. Instead, they hold bonds, asset-backed securities (ABSs) and collateralised debt obligations (CDOs), and much of this is actually relatively liquid.

As an example, let's look at EJF Investments (LSE: EJFI), one of the more esoteric debt funds in the sector. It has a market value of just £76 million and trades at a 24% discount to NAV.

The trust's assets are mostly loans made to smaller banks and insurance companies in the US that have been packaged up as CDOs. It also invests in some other forms of bank debt and in credit-risk transfers (being paid to take on the credit risk on some of a bank's portfolio of loans). At the end of June, it also had around 23% invested in money-market funds and other cash-like instruments, giving it plenty of liquidity to take advantage of opportunities when they emerge.

EJF Investments also owns 50% of EJF CDO Manager, the firm that manages many of the transactions behind these CDOs. In a recent deal, the firm deployed $13.3 million (10% of NAV) into a CDO with the descriptive name of TFINS 2026-2, which is made up of debts issued by 64 US financial institutions. The estimated lifetime yield on the asset is 15%. Since EJF CDO Manager is one of the managers on the deal, it will receive 0.30% per year in fees on the $300 million total value of the CDO.

EJF – a debt fund with solid fundamentals

Broker Panmure Liberum thinks the best way to assess the health of EJF's portfolio is to look at the performance of the underlying issuers. US regional banks have performed well this year, with the KBW Nasdaq Regional Banking index up 19%.

Lenders are benefiting from improving balance sheets, a better regulatory environment and solid demand for borrowing, says analyst Shonil Chande, while rates are supportive. “Banks fund short and lend longer, and while policy rates have fallen from their 2025 peaks, lending rates remain higher further out on the curve.”

Smaller US lenders are also attracting bids from larger peers. Outstanding credits are usually redeemed in these transactions as the buyer can often refinance at lower rates. That reduces income from management fees, but delivers immediate capital gains when credits are called at a premium.

EJF is a specialist debt fund and it will not be suitable for all investors. What's more, fees are high. Investors are being asked to cough up 1.9% per year for access to this niche credit market. But with a yield of 8.5%, the shares look like an attractive income play trading at one of the deepest discounts in the sector.

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Ten years ago, the directors of JPMorgan Global Growth & Income (LSE: JGGI) – then called the JPMorgan Overseas Investment Trust – adopted a new strategy to address the fund's persistent discount to net asset value (NAV). The trust would invest globally without regard to income but pay an annual dividend of at least 4% of net assets. The idea was to give investors an attractive income via an approach that wasn't held back by the hunt for yield.

The renamed fund was an instant success. Performance improved, and the discount to NAV disappeared. The trust grew – by absorbing two other trusts in 2021 and 2025 and by issuing new shares for cash – and achieved greater economies of scale. Today, JPMorgan Global Growth & Income has £3.4 billion of assets – up from £200 million a decade ago – and operating costs of just 0.42%.

JPMorgan Global Growth & Income's spell of weak returns

However, the shares returned to a discount amid the wider market setback for investment trusts in 2022 and the directors had to start buying back shares again. The discount shrank, but in August 2024, performance began to flag. A NAV return of 16.7% over one year and 50.9% over three lags the benchmark (the MSCI AC World index) by 11% and 13.4% respectively. However, manager James Cook points out that it is still nearly 2% per year (net of fees) ahead since the change of strategy.

“We have seen many similar drawdowns over the last 30 years for our style,” he says. “On average, they last a year and cost performance 9%.” The latest one has lasted longer and cost more, which reflects market trends. “It has been a market strongly based on momentum rather than on the long-term valuations and earnings growth, but a return to normal will be very good for fundamental investors, as it has been after previous such phases.”

Cook and his team look for firms with high-quality earnings that are growing 2% faster than average but valued similarly to the market based on free cash flow. “Less than 3% out of 2,500 stocks in the investment universe offer all three.”

Manager James Cook backs AI winners

Cook has been reducing exposure to “low growth cyclicals” and buying AI-related semiconductor stocks such as Nvidia, which is 6.3% of the portfolio. “It is back at a trough-level multiple, yet the AI market keeps accelerating, and its newest Rubin chip is five times more powerful than the Blackwell chip.”

AI “is bigger than the internet in 2000, with long duration growth. Semi-conductor manufacturers are booked out for years.” Hence TSMC is also in the top five holdings. “It is really attractive on valuation while producing over 90% of the world's leading-edge chips.”

Overall, the technology sector makes up 25% of the portfolio (excluding Alphabet and Amazon, which are classified elsewhere). Cook has also been buying payments network Mastercard – “widely regarded as an AI loser but the fraud detection and identity verification services it provides are increasingly important”.

Insurer Tokyo Marine was added for its “strong earnings growth” shortly before Berkshire Hathaway acquired a stake and pushed the share price up 30%. Vesta, a provider of assisted living in the US, is “the beneficiary of demographic change in a market with a structural supply shortage”. Oil major Shell has been bought on “a really attractive valuation”.

Few of these are high-yielding. Sizeable positions in Alphabet, Amazon, Apple, Microsoft, Nvidia and TSMC would be impossible if the 4% yield were paid solely from income, showing the flexibility of this strategy. Most of JPMorgan's other trusts and some other firms have followed JPMorgan Global Growth & Income's lead in paying an enhanced dividend out of capital, reducing its competitive advantage. But for yield-hungry investors unwilling to sacrifice capital returns for extra income, it is attractive, while Cook's case for the period of dull returns being near the end is compelling.

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The ‘active versus passive’ debate has raged for over two decades, with one investment style broadly dominating the other at any given time.

Investing platform AJ Bell’s latest Manager vs Machine report, found that just 42% of active funds outperformed a passive alternative during the first half of the year – despite typically charging higher fees than passive counterparts.

Analysis from investment research company Morningstar has backed up the notion that active managers underperformed passives during the first six months of 2026. Morningstar analysed the performance of around 32,000 active and passive Europe-domiciled funds (accounting for around half the assets in the European fund market).

It found that, during the first six months of 2026, the one-year success rate for active equity managers (the percentage of active funds that both survive and outperform comparable passive alternatives over the last year) fell to 28.4%, from 30.5% at the end of 2025. Active managers’ success rates fall further over longer time periods, too: the figure stands at 20.3% over three years, 15.2% over five years and 11.9% over 10 years.

“We’ve had yet another six-month period where a large chunk of professional stock pickers failed to deliver the outperformance they’re being paid to do,” said Dan Coatsworth, head of markets at AJ Bell.

Given that active funds usually charge higher fees, why are they underperforming compared to passives?

Which active funds struggle to keep pace?

AJ Bell identified certain areas where the performance divergence between active and passive funds was especially marked.

While only 22% of global active funds beat their average passive equivalent, UK-focused actively managed funds fared even worse; just 19% beat their passive peers in the first half of 2026.

Coatsworth said the handful of global equity managers that outperformed did so by a significant margin, but overall the data was a “huge embarrassment for the active fund management industry”.

Global trackers, according to Coatsworth, have become the default choice for first-time investors. “Low costs and broad exposure to companies around the world make them easy-to-understand investment products. For some people, that’s all they need.”

But this has led to heavy market concentration, particularly in large US technology companies.

The MSCI World index, for example, has more than 1,200 constituents but the top 10 account for more than 25% of its total assets.

“Part of the problem is down to market concentration, with global indices heavily driven by a handful of stocks dominated by the technology sector,” said Coatsworth. “Any manager with less exposure to these blockbuster names than the global benchmark might have struggled to outperform.”

Similarly, Eugene Gorbatikov, passive strategies analyst at Morningstar, said that high concentration had made it “difficult for active managers to keep pace with the momentum generated by the technology sector”.

Why are active managers underperforming?

Coatsworth pointed out that certain sectors – such as gold mining, defence, pharmaceuticals and biotechnology – that were stronger in 2025 lost momentum in the first half of 2026. “Active managers might have been caught out by the rotation and didn’t move fast enough, or they were simply parked in the wrong sectors to beat their passive counterparts,” he said.

There is an argument that active managers’ underperformance isn’t related to skill, but is to some extent inevitable given the rise in popularity of passive funds.

By definition, market cap-weighted index funds (which are a natural choice for most inexperienced investors) act to boost the market caps of larger companies when their share price is rising.

An academic study by Hannah Unterberg of the University of California’s Paul Merage School of Business, published in June, attributed the decline in active manager performance to the rise of passive funds, especially after 2010.

It made the case that any time money leaves an active fund and goes into passive funds, this hampers an active manager’s performance – because they are forced to sell holdings, especially the stocks that are least popular but in which the manager has high conviction. In other words, the ones that are supposed to give them an ‘edge’.

Perhaps it’s not about picking either active or passive, but about recognising the potential advantages and shortcomings of each.

“We champion a blended approach,” said Dan Cartridge, fund manager at Hawksmoor Fund Managers. “No one has solved investment, and styles and approaches come in and out of favour.

“Despite the 15-odd years where passive has performed well, that doesn’t mean it will continue indefinitely. There have been long windows over the past 15 years where active funds have performed well.”

His team’s flagship multi-asset fund, Hawksmoor Vanbrugh, launched in 2009 and has beaten a typical 60/40 equity/bond passive mix since inception.

Does the asset class matter when choosing active or passive?

Cartridge added that it is worth making sure that your active positions are used to gain exposure to something you don’t already have via passive investments – otherwise you’re just doubling down and duplicating positions.

There are also discrepancies in the relative performance of active and passive funds in different asset classes.

Morningstar’s analysis found that active bond managers tend to outperform active equity managers – though even in this category, one-year success rate fell to 46.8%, from 54.8% at the end of 2025.

There is also some discrepancy within equity funds. AJ Bell found that almost two-thirds of active funds from the Asia Pacific ex-Japan (65%) and Global Emerging Markets (63%) sectors beat their passive counterparts.

Certain markets generally lend themselves better to index investing. The larger, more liquid, more widely researched a market is, the less chance an active manager has to discover price discrepancies or hidden gems that aren’t widely known by their peer group.

Active managers typically struggle to beat a US large-cap index, whereas smaller and mid-cap stocks tend to offer a better hunting ground for active stock pickers – in any market, not just the US.

Technology, and its ever-present subsector artificial intelligence (AI), are perhaps the hottest topics in investment – and have been for several years.

Information technology officially accounts for 32% of the MSCI ACWI Index. Yet in reality, what we’d all intuitively think of as ‘tech’ companies account for a greater proportion of this, since MSCI officially designates companies like Alphabet, Amazon, Meta and Tesla into industry sectors other than information technology.

This concentration brings risks with it. Passive tracker funds act to condense stock markets into the biggest names, and investors therefore run the risk of being over-exposed to the sector – which can exhibit volatility when times get tough.

There is also the intensely competitive nature of tech growth to contend with. Nascent, disruptive technologies like AI can create as many losers as winners, if not more. Knowing which stocks to invest in can be difficult, even for the professionals.

An investment trust – which is by definition actively managed – has the potential to mitigate some of these risks, and the vehicles offer some structural advantages too.

“The closed-ended nature of investment trusts makes them well-suited to technology investing,” said Alex Trett, investment trust research analyst at Winterflood Securities.

“The permanent capital allows managers to take a genuinely long-term approach, supporting investments in private companies and giving them the patience to see investment theses play out over time.

“The structure can also facilitate exposure to smaller-cap technology businesses, where liquidity can be a constraint for other investment vehicles. In addition, it enables managers to build concentrated, high-conviction portfolios, allowing them to express their strongest investment ideas.”

Here’s six of the best-known investment trusts that can offer you exposure to some of the world’s most innovative technology companies.

Scottish Mortgage

Just as many ‘big tech’ companies aren’t designated tech, one of the biggest investment trusts that many people think of as ‘tech-focused’ isn’t actually a technology trust.

Scottish Mortgage (LON:SMT) aims to own “the world’s most exceptional public and private growth companies”. As it happens, a lot of these are tech companies, but the trust emphasises that its focus is on long-term growth potential, whatever sector that may be in.

Still, buy Scottish Mortgage now and you’ll get a lot of tech. As of 30 June, SpaceX accounted for over 25% of the portfolio, followed by Taiwan Semiconductor (6.4%), Nvidia (5.0%) and TikTok’s owner Bytedance (4.2%).

ByteDance and, until recently, SpaceX have exemplified part of the appeal of SMT: its ability to hold private companies alongside publicly listed ones, tapping into the future growth potential they offer. The heavy weighting towards SpaceX is largely a consequence of this and its recent initial public offering (IPO); Trett expects the position to be trimmed once lock-up periods permit.

^{Source: Association of Investment Companies, as of 21/07/26.}

Polar Capital Technology

Polar Capital (LON:PCT) has focused its approach on the hardware and infrastructure underpinning the buildout of artificial intelligence (AI).

“The managers believe these areas offer greater earnings visibility and forecastability, with semiconductors representing the largest exposure at 44% of the portfolio, followed by equipment, components and storage including Advanced Micro Devices and LAM Research,” said Trett.

^{Source: Association of Investment Companies, as of 21/07/26.}

Allianz Technology Trust

All of these trusts are listed in the UK, but Allianz Technology (LON:ATT) is distinctive in having its management team based in San Francisco, giving it close access to many of the companies in its portfolio – approximately 90% of which is allocated to North America, as of 30 June.

“The portfolio provides broad exposure across the technology and AI ecosystem,” said Trett.

“The managers have highlighted the role of technology in creating differentiation across a wide range of industries [and] believe the AI opportunity is continuing to broaden beyond the initial infrastructure buildout, supporting a more diversified and durable phase of growth across the technology sector”.

^{Source: Association of Investment Companies, as of 21/07/26.}

Schiehallion

Like Scottish Mortgage, Schiehallion (LON:MNTN) is managed by Baillie Gifford and, depending on how pedantic you’re feeling, isn’t technically a technology investment trust.

But it has an interesting focus on early-stage companies – even more so than SMT, given that it invests in later-stage private companies.

“While not a dedicated technology fund, technology represents around 47% of the portfolio, with holdings including Anthropic, Bending Spoons, SpaceX, ByteDance and Databricks,” said Trett.

^{Source: Association of Investment Companies, as of 21/07/26.}

Herald Investment Trust

Again, Herald Investment Trust (LON:HRI) technically belongs in the Global Smaller Companies category, but it has a strong focus on technology and communications companies.

It was the subject of a bid from Saba Capital Management to displace its board, which led to a tender offer and for the trust to become part of Aberdeen.

Trett picks out Super Micro Computer, BE Semiconductor Industries, Celestica and Fabrinet as among its key holdings.

^{Source: Association of Investment Companies, as of 21/07/26.}

Manchester and London

Some people use investment trusts to diversify away from big tech concentration. Manchester & London (LON:MNL) is an investment trust for people that want to lean into it.

The fund takes a concentrated approach to investing and predominantly holds large-cap stocks, with AI a high-conviction play for the managers.

“The fund’s concentrated portfolio allows it to hold significant positions in its preferred ideas; Nvidia represented 43.6% of net assets in January before being subsequently reduced to 9.0% as at 30 June,” said Trett.

^{Source: Association of Investment Companies, as of 21/07/26.}

There have been just three initial public offerings (IPOs) of investment trusts between 2023 and 2025, and none of them raised over £100 million. Achilles Investment Company (LSE: AIC), an activist trust, raised £54 million last year, while Ashoka WhiteOak Emerging Markets (LSE: AWEM) raised £30.5 million in 2023. Both have received a reasonable amount of coverage.

By far the smallest and least well-known of the three is Onward Opportunities (LSE: ONWD), which has raised £12.8 million through a listing on Aim in 2023. It has since grown in size to £42 million via several follow-on raises and graduated from Aim to the main market this year.

Onward Opportunities has a focused approach

Onward, which focuses on UK smaller companies and micro-caps, set a target of earning an annualised return of at least 15% and doubling invested capital within a three-to-five-year holding period. A share-price return of 18.5% (and a total net asset value (NAV) return of 26%) over three years means that it has so far failed to meet this goal. Still, it has outperformed the UK Aim All-Share total return index (8.4%) and matched the performance of its peer group, the AIC UK Smaller Companies sector.

The trust is managed by Laurence Hulse, who started his career at Gresham House in 2015. He worked on a number of equity funds – including Gresham House Strategic (which is now Rockwood Strategic (LSE: RKW)), the Strategic Public Equity Fund and the Gresham House Smaller Companies Fund – before he moved to Dowgate Wealth in 2022 to start Onward. Hulse and his team own 5% of the trust, and Dowgate owns 33%.

Onward has a concentrated portfolio of ten core positions and 12 smaller holdings (25% of the portfolio), which the team call “nursery” positions. It looks for profitable, cash-generative businesses, while also aiming to take meaningful positions in situations where an activist approach can unlock value.

The top two holdings at the end of June were Likewise (9.5%) and Angling Direct (8.3%). Likewise is a UK distributor of floor coverings, rugs, and matting that Onward first bought in 2024. It doubled down on the position at the end of last year, arguing that Likewise is well-positioned to outperform its “loss-making and heavily indebted rivals”, whose continued decline is a key part of the thesis. CEO Tony Brewer, who co-founded the firm in 2018, was previously at competitor Headlam, where he increased the firm's value tenfold between 2009 and 2015.

Angling Direct, a leading UK retailer of fishing equipment, has been a top holding for the trust since its inception. Onward wants management to reconsider the company's expansion into Europe amid continued losses and to focus on its app and social channels.

Pottery firm Portmeirion is a recent new nursery holding. While this firm has lost money over the past two years, Onward believes its new CEO Michael Scheepers, who comes from Le Creuset, can help drive the company forward.

Onward Opportunities is too expensive

While Onward is establishing a solid record in the small and micro-cap sector, the fees are quite pricey. The management fee is 1.5% of NAV up to £50 million and 1% above £50 million. On top of this, there is a performance fee of 12.5% of the excess return above a non-compounding hurdle of 6% per annum. While this gives managers an incentive to outperform, it's eating into returns.

Ongoing charges, including the performance fee, hit 4.4% in 2024 and 5.2% in 2025. This makes the trust nearly five times more expensive than the weighted average for its peer group, and 2.5 times higher than Rockwood Strategic, which has returned 56% over three years.

It's a shame that performance accrues to the managers rather than to investors. Strip out the fees and it would be a top performer.

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Segro's roots go back over 100 years. In 1920, Noel Mobbs led a consortium to buy 1.8 million square feet of workshops and 17,000 vehicles on a 600-acre site west of London. It had been a depot for the disposal of vehicles no longer needed by the army, but after disposing of the stock – which took five years – the new owners decided to turn the site into an industrial estate called the Slough Estate.

The venture attracted businesses including Mars, Gillette, Johnson & Johnson and Citroen, some of which are still there. The company diversified away from Slough but the Mobbs family remained involved into the 1980s.

The company's assets expanded across the UK and Europe and it rebranded as Segro (LSE: SGRO) in 2007. Yet industrial property was the Cinderella of the wider sector, less popular with investors than office and retail property. The advent of logistics warehouses and data centres changed that and Segro became the hottest stock in the sector. The shares rose above 1,400p in 2021 and traded at a significant premium to net asset value (NAV).

But over the next four years, the price halved amid rising interest rates. The shares fell to a discount to NAV, which had itself dropped by more than a quarter. In mid June, the shares stood at under 750p. Then Segro became the latest UK property company to receive an unsolicited bid. US logistics giant Prologis (NYSE: PLD) has proposed an all-share deal valuing Segro at a little above NAV. Segro's board says this is “opportunistic” given “the highly attractive underlying business and strong prospects”.

Segro is operating in a shunned sector

Marcus Phayre-Mudge, manager of the £1 billion TR Property Trust (LSE: TRY) had avoided the shares but rebuilt a holding in the last year. In his latest webinar, he listed 16 takeover bids by other listed companies and 16 by private equity across Europe to illustrate the attractiveness of the sector to corporate buyers at a time when investors have been shunning it.

“There is very little oversupply, rental growth is coming through and there is no speculative development,” he says, “the opposite of the early 1990s and before the financial crisis.” In addition, “a huge rise in costs means a low level of construction and an undersupply of prime space.” The weighted average discount to NAV in the sector is over 30%. This is below the peak discount of 45% in 2022, but still in the cheapest quartile since 1990.

To capitalise on this, TRY has geared up: borrowings equal 17.6% of net assets, close to its maximum of 20%.

The sector is still waiting for an upturn

A sector upturn is far from certain. Property faces many challenges. Population growth across Europe is, at best, static. Retailing continues to move online. Demand for office space is restricted to prime locations. The rush to build logistics hubs has abated. Student housing is a mature market. Leases have become shorter. Buildings become obsolete faster than ever, requiring expensive refurbishment or rebuilding.

TRY – which currently has 35% in the UK and 65% in Europe – has seen NAV fall 7% over five years, while the shares are down 8%. However, it has outperformed its benchmark in 14 of the last 15 years. A 32% gain over three years suggests an upturn, but performance has been flat over one year.

Still, a 9% discount to net NAV and a dividend yield over 5% means investors are paid to wait. Phayre-Mudge and his team continue to find niches of undervaluation, opportunity and growth. Consolidation will make the sector “more attractive to wealth managers who struggle to justify large positions in sub-£500 million companies”, he says.

That does not apply to Segro with a market value of £12 billion. This bid marks another milestone in the endless contraction of the London Stock Exchange. Its departure would be a short-term gain for investors, including TRY, but a dismal outcome for the UK.

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Is the shine coming off the Nasdaq 100?

The index – effectively a benchmark for US big tech, since it includes the largest 100 stocks listed on its namesake exchange but excludes finance companies – reached an all-time high of 30,730 on 3 June.

Over the next month, the index fell by 4.6%.

Increased fears over a potential artificial intelligence (AI) bubble bursting have played their part in this demise.

The AI boom over the last few year has been driven largely by a consensus that the enormous sums spent on AI infrastructure would inevitably pay for themselves.

“Now that is changing, and some [tech companies] are issuing debt to fund their AI operations,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC) – an industry body that represents the UK’s investment trusts. “It’s understandable that some investors are looking to diversify their portfolios away from the AI boom and many investment trusts offer a great opportunity to do this.”

Any passive investments you hold will likely be heavily exposed to the big tech stocks that form the bulk of the Nasdaq 100 and the S&P 500.

“Correlation is the real risk in current markets,” said Saftar Sarwar, chief investment officer at model portfolio service manager Binary Capital. “A ‘diversified’ global portfolio is often not that diversified. Five companies account for around 30% of the S&P 500 – a very high level of concentration.”

But could these investment trusts offer some diversification and protect you in case the bubble bursts?

How to diversify away from AI

One of Sarwar’s first tips for diversifying away from AI is to avoid the “obvious emerging markets” of Korea and Taiwan.

These, he says, “are now significant technology-exposed equity markets”.

Instead, he recommends “so-called emerging frontier markets” like Poland, Egypt and Turkey, and picks out BlackRock Frontiers Investment Trust (LON:BRFI) as a route to gaining exposure given its 52% weighting towards financials.

Tomiko Evans, chief investment officer at portfolio manager Crossing Point Investment Management, recommends European stocks as another market that could offer diversification.

“Europe gives investors access to a broader mix of companies across sectors such as industrials, financials, healthcare, consumer goods and infrastructure-linked areas,” she said.

“Within this space, JPMorgan European Growth & Income (LON:JEGI) is one option we find interesting. The trust provides exposure to growth, but through a diversified European equity portfolio,” Evans continued. “Its approach combines quality, value and earnings momentum, allowing the managers to seek companies with attractive growth prospects while remaining disciplined on valuation.”

Buy British to avoid AI?

Both Evans and Sarwar believe undervalued UK stocks provide fertile ground for anyone looking to reduce their exposure to AI.

“UK equities have spent a decade unloved, and undervalued, for exactly the reason that now could look like an important advantage: minimal AI and technology exposure,” said Sarwar. “Trusts such as Merchants Trust (LON:MRCH), City of London (LON:CTY) and Law Debenture (LON:LWDB) own UK value or UK traditional equities with dividend yields of around 3% to 4%... These are good investment trusts if you want to move away from the whole AI theme and believe that the UK offers more compelling equity valuations relative to other markets.”

Sarwar also highlighted Temple Bar Investment Trust (LON:TMPL) for its value discipline and its heavy weighting towards the UK in comparison to the US.

Evans, meanwhile, picked out Murray Income Trust (LON:MUT). “Rather than simply owning the traditional large cap UK income names, the managers can look across a broader range of companies that can generate cash, pay sustainable dividends and offer scope for capital growth,” she said, adding that the trust offers “UK equity exposure, income discipline and relatively limited direct technology exposure” for investors that want to reduce their tech exposure without moving fully into defensive assets.

Good news for shareholders in the International Biotechnology Trust: their fund has a significant holding in US cancer research business Nuvalent, for which GSK has just agreed to pay $10.6 billion– 40% more than its share price prior to the deal being announced. Even better: Nuvalent is the sixth company in the portfolio to have been acquired at a premium this year.

The deals are part of a spree of merger and acquisition (M&A) activity taking place in the global biotechnology sector – to the benefit of many investment trusts and open-ended funds specialising in this area – as part of a marked reversal in fortunes. For much of the past few years, sentiment in the sector has been downbeat – preoccupations about risk, volatility and rising interest rates have overshadowed optimism about the undoubtedly huge long-term potential of the products. More recently, however, the tide has turned. “The outlook is looking increasingly constructive,” says Jo Groves, an analyst at Kepler Trust Intelligence.

The fundamentals of investing in biotech are compelling. You're backing companies that are developing new treatments for health problems ranging from life-threatening cancers to lifestyle-related illnesses. The demand for such treatments is huge, particularly in the context of rising and ageing populations as life expectancies increase. The United Nations estimates that the number of people in the world aged 65 or over will rise from 800 million in 2024 to two billion by 2067. No wonder biotechnology is such a high-growth industry. Precedence Research forecasts average annual growth of 4% over the next decade, which would see the market grow from $1.8 trillion today to $6.3 trillion by 2035. At the same time, biotechnology companies are finding new ways to respond to demand, developing ever more sophisticated treatments, even for the most complex diseases and conditions. For example, they're harnessing technologies such as AI to accelerate drug discovery and to move into areas that scientists previously considered too ambitious.

Another positive factor is the so-called “patent cliff”. Pharmaceutical companies are only entitled to exclusive rights to the drugs they own for a limited period; once this period ends, rivals can make their own versions of the drug. This adds to the demand for biotechnology companies that develop new treatments while individual companies continue to benefit from the enhanced revenues that the patents generate.

Biotech M&A generates positive returns early

All of this can add up to exciting returns for investors in biotechnology companies working on new drugs in high-value areas. And often, those returns materialise early, because a biotechnology company with a promising pipeline of treatments is an attractive takeover target for the global pharmaceutical industry. The biggest companies do blockbuster deals – Novartis alone spent $29 billion on M&A last year.

Investing in biotechnology also carries risks and potential downsides. In particular, most biotech companies are relatively small and focused on a handful of specialist projects – perhaps even a single drug candidate. Trials that start out looking highly promising can – and often do – fail later on, leaving the business without a product to sell. When investors are feeling broadly optimistic, they're more willing to take such risks, but during less confident times their appetite for danger may be diminished. Global trade tensions and international conflict have therefore been challenging headwinds for biotech investment in recent times.

Another factor is the cost of finance – partly as biotechs often borrow to fund their early-stage work, but also because investors are effectively being offered returns that will come in the future rather than today; such returns needed to be discounted by what investors could earn elsewhere on their cash in the meantime. In this context, rises in global interest rates during 2024 and 2025 were unhelpful to biotech businesses; more recent reductions have been a positive.

Policymakers can also have an impact on the industry in other ways. Most countries attempt to regulate drug prices in some way or to restrict intellectual property rights. The US, the world's biggest spender on pharmaceuticals, is especially important; the industry was certainly anxious about the approach Donald Trump would take in his second term of office.

Ebbs and flows in all these positive and negative factors feed the cycle of biotech businesses' share-price performance. The sector performed poorly through most of 2024 and early 2025, but has been much stronger over the past 12 months. The Nasdaq Biotechnology index has risen by more than 51% over the last year; the MSCI World Biotechnology index is up by more than 15%.

Still, sometimes it's also important to look past the numbers. One fascinating part of the biotechnology story is the incredible science that businesses are pursuing – and the advances they're making for humanity. “The development I find most compelling is RAS-targeted therapy,” says Oliver Kenyon, a senior director at RTW Investments, pointing to cancerous tumours caused by mutations in the RAS family of genes. “RAS mutations drive roughly 90% of pancreatic cancers, 40% of colorectal cancers and 30% of non-small-cell lung cancers. It's one of the most common drivers in all of oncology, and for decades it was considered ‘undruggable' – that's now changing fast.” We are seeing the “combination of genomics, gene editing and AI accelerate both the discovery and development of new medicines”, adds Chris Hollowood, CEO of Syncona Investment Management.

AI is helping biotech companies deliver

AI is also helping, says Hollowood. Researchers are analysing complex biological and clinical datasets and identifying promising targets in a “more efficient and robust” way. “The last decade saw the development of a huge number of new ways to make drugs; gene therapy, cell therapy, RNA, gene editing and many others. So as these new targets emerge in the next decade, developers and patients have many more ways to address them, meaning medicines will be more precise and have greater impact.”

So much is possible. “A real hope would be if something works for Alzheimer's disease,” says Marek Poszepczynski, portfolio manager of International Biotechnology Trust. It has been especially tough to find efficacious drugs in this area, but “the industry continues with its efforts and perhaps we will see something in the next decade or so”.

And breakthroughs in mental health are possible, too. “Around a third of the 300 million people living with depression globally don't respond adequately to existing antidepressants,” says Kenyon. “Conventional psychiatry has largely run out of answers for that population, but psychedelic-derived medicines are starting to change that.”

It's not just about developing cures to diseases and conditions previously thought untreatable. Geoffrey Hsu, general partner of OrbiMed, points to the huge and ongoing impacts of weight-loss drugs. “Their effects are not purely cosmetic,” he says. “These medications in clinical trials have reduced the incidence of strokes, heart attacks and diabetes, and have helped alleviate symptoms of patients suffering from sleep apnoea and osteoarthritis.”

Biotechnology firms are at the heart of innovation in all these areas, says Groves, who points to data from industry analyst IQVIA showing that the number of clinical trials currently stands close to all-time highs. “The rapid development of biologic treatments and therapies is constantly expanding the [range] of products, particularly in chronic and complex diseases,” she says. “There has also been a healthy pipeline for novel drug approvals, with recent approvals for treatments for lung cancer, leukaemia, haemophilia, schizophrenia and Alzheimer's, amongst others.”

All of this points to a potentially exciting period for the biotechnology sector – and the prospect of further gains to come. Further M&A would help – while the pace of deals has accelerated in recent months, many analysts think there is more to come. Partly, that reflects the patent-cliff issue, with pharmaceutical companies now approaching a particularly precipitous drop-off. Between now and 2030, the industry will lose exclusivity rights to drugs currently generating $230 billion of revenues a year; they won't forfeit such money overnight, but as patents run out, rivals will be able to produce much cheaper alternatives. Other drivers of M&A include the increasing desire of many pharmaceutical businesses to diversify their holdings, acquiring biotechs with drugs that take them into new areas, and the accumulation of deal finance during a period of fewer deals. It also helps that the US government appears to be taking a more laissez-faire approach to regulation.

In this case, there is still some time to join the biotech party. At an aggregate level, valuations remain reasonable by historical standards – and while there have been good gains from many stocks, the sector's performance has been eclipsed by, for example, the surge in the technology arena. Still, the vast majority of investors will prefer to get exposure through a collective investment fund rather than by buying individual stocks themselves. The science is just too advanced for non-specialists to make realistic assessments of the prospects of individual businesses and their key drugs.

A fund offering diversified exposure to a pool of companies chosen by a professional manager therefore provides relative comfort. Indeed, managers in the sector are often more qualified and experienced than peers investing in other industries, with relevant clinical experience of their own as well as professional investment experience. We look at some of the best options in the box below.

The best biotech stocks to buy now

A broad range of collective funds invest in the sector, but there's a strong argument for considering a closed-ended trust over other types of fund. Biotech can be an illiquid area and prone to exaggerated shifts in sentiment that drive significant inflows and outflows of cash. A trust, where you're buying exposure to the underlying portfolio of assets, provides some insulation from that.

The Association of Investment Companies' healthcare and biotechnology sector offers seven investment trusts to choose from. Its top performers over the past 12 months are the Biotech Growth Trust (LSE: BIOG), with a total share price return of 103%, the RTW Biotech Opportunities Trust (LSE: RTW), up 93%, and the International Biotechnology Trust (LSE: IBT), which has returned 83%.

Alex Trett, a research analyst at Winterflood, points to the potential of two in particular to continue benefitting from M&A activity. “RTW Biotech Opportunities has seen ten M&A-related transactions in the last 12 months, all resulting in an immediate uplift to net asset value,” he says. Worldwide Healthcare Trust (LSE: WWH) is another beneficiary. “In addition to its portfolio holdings, the trust maintains a basket of M&A swaps that provide exposure to potential takeover activity across the sector.” Should the current pace of M&A activity persist, “we believe these trusts remain well-positioned to benefit. They combine extensive sector resources with teams possessing deep scientific and medical expertise, enabling them to identify innovative firms and emerging technologies, which in some cases become attractive acquisition targets.”

That's not to say open-ended funds should automatically be excluded. If you prefer this type of vehicle, Dzmitry Lipski, head of funds research at investment platform interactive investor, picks out the Candriam Equities L Biotechnology Fund, run by Linden Thomson. The Luxembourg-domiciled fund has holdings in around 75 companies.

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The MoneyWeek ETF portfolio saw its annual rebalancing at the beginning of April, as the Middle East crisis raged. We cut a bond position that was stale and superfluous, and held the cash to reinvest once the outlook was clearer. This week, I set out to write that promised update – only to see the conflict ramp up to its worst for at least a month.

Nonetheless, this is still a good time for a decision. The point of the ETF portfolio is certainly about sharing our top-down views on markets, but it is also about having a process for investing. Holding lots of cash for too long because of fears of what might happen is a good way to earn worse returns over the long term.

The most protective part of our portfolio lies in very short-dated government bonds (essentially a cash proxy with a near-4% low-risk yield) and short-dated inflation-linked bonds (we think there is a growing risk of inflation picking up on a one-year view). These invest in US bonds, but are hedged back to sterling. We would hold UK bonds instead for simplicity, but the equivalent ETFs don't exist.

Oil stocks have benefited us in this crisis and remain reasonably attractive, but we would consider trimming them if peace sets in.

Gold has not done as well lately as many investors expected and with hindsight we can be grateful that rebalancing in April automatically took some profits from a strong run-up. My view is that gold often doesn't shine in the immediate phase of a crisis and the key factor is whether fears about inflation and the dollar's role as global reserve currency continue to increase gold's appeal over the longer term.

Balancing tech exposure in our ETF portfolio

Meanwhile, our equity positions viewed together mean we are far less concentrated in the US than the global index. Our decision to switch into the equal-weighted version of the S&P 500 last year – to reduce our concentration in the tech mega-caps – was early, but has not hurt us too much: the market has shown signs of rotating away from them lately. We have done well in Japan and in emerging markets. However, we need to be very aware of the extent to which non-US markets are geared to the AI trade.

I have discussed this several times with regard to emerging markets recently, and this leads us to an obvious decision. Last week (issue 1319), I suggested using the new WisdomTree True Emerging Markets (LSE: WEMP), which does not hold China, Korea and Taiwan, as a way to balance some of the tech and East Asia bias that is dominating the emerging-market index. Using some of the cash to add 5% in this should give us more diversification, although note that since this is not a well-established core index, it is a bit harder to be sure what performance we can expect in different scenarios. That leaves 5% still in excess cash, which I will look at next time in conjunction with the one position I have not yet discussed – real estate.

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One of the best ways to gauge how your fellow investors feel about the market is to follow the money.

The flows of cash in and out of European exchange-traded funds (ETFs) during June suggests a pivot back towards US stocks and funds and away from their European counterparts, according to analysis of etfbook.com data from investment manager Fidelity International.

June was a strong month for European ETF flows overall, attracting just under $45 billion in total funds – 29% above the three-month average monthly flow and 19% above the 12-month average.

“Strong corporate earnings, combined with new record highs in equity markets, have boosted investor confidence,” said Stefan Kuhn, European head of ETF and index distribution at Fidelity International.

If you’re considering where to invest for the coming months, it can help to have an idea of which way the money has been going recently.

Fund flows shift from Europe to America

Funds investing in North American equities saw $14.7 billion of inflows during the month, more than three times the monthly average for the region over the past year.

Much of the strength in American stocks will have been driven by demand for artificial intelligence ETFs, with the US still the major player in the theme. The sector also received a sentiment boost in June from SpaceX’s record-breaking initial public offering.

At the same time, though, European investors appear to have abandoned their domestic markets, with Europe-listed ETFs targeting European stocks registering $2.2 billion in outflows in June.

^{Source: etfbook.com via Fidelity International. Data as of 30 June 2026.}

“The story of the second quarter was the return of the United States,” said Kuhn. “While investors were allocating more heavily to Europe and other regions at the start of the year, we are now seeing a clear preference for the US market again,” he added.

June marks the third consecutive month of outflows for Europe-focused funds according to Fidelity.

Commodity ETFs slide as investors snap up active ETFs

Demand for commodity ETFs waned during June, coinciding with a decline in gold prices as expectations for higher interest rates (particularly in the US) rose and the war in Iran appeared to be simmering down.

“With the immediate escalation phase now behind us, some of the geopolitical risk premium has faded from commodity markets,” said Kuhn. “At the same time, many investors expect central banks to keep interest rates higher for longer, making non-yielding asset classes such as gold less attractive.”

Actively-managed ETFs, though, continue to soar in popularity. June was a record month for flows into this category of funds, according to Fidelity’s analysis.

“Strong demand for active ETFs shows that investors increasingly want to differentiate between regions, sectors and individual companies,” said Kuhn. “In a market where the gap between winners and losers is widening, active security selection can provide real added value.”

SpaceX has joined the Nasdaq 100, meaning passive funds that track the index will now automatically hold positions in the company, which listed on 12 June.

SpaceX (NASDAQ:SPCX) joined the index today (7 July), a week after it was added to the Russell 1000 Index (29 June).

Bloomberg reported SpaceX could look forward to an estimated $5.4 billion of inflows as a result of ‘forced’ buying by index funds that track these two indices.

Elon Musk’s space exploration company was fast-tracked for inclusion following rule changes by the index providers, put in place to reflect the unprecedented size of some initial public offerings (IPOs) coming to market.

Nasdaq’s new rules now allow freshly listed companies to be included in as few as 15 trading days, rather than its previous minimum period of three months after an IPO.

What will SpaceX index inclusion mean for flows?

Nasdaq says globally, there is around $1.4 trillion in assets tracking its component companies’ combined market capitalisation (market cap) of $31.5 trillion, around half of which do so through exchange-traded funds (ETFs). The other half is in derivative products, such as futures and options.

The Nasdaq 100 index represents the largest 100 companies, excluding financials, listed on the Nasdaq Stock Market. Often described as a tech-focused index, it contains all ‘Magnificent 7’ names – Alphabet, Amazon, Apple, Tesla, Meta, Microsoft and Nvidia. But it also contains many other companies with a value of $100 billion or more from healthcare, industrials and materials, for example, with representation across 10 of the 11 standard industry classification sectors.

When a stock joins an index like the Nasdaq 100, funds tracking that index are effectively forced to buy its shares so that they still reflect the index. This creates additional demand for a stock and could push up its share price.

The UCITS version of Invesco’s Nasdaq-100 ETF (LON:EQQQ) is the largest Nasdaq-tracking ETF available to UK investors. Barclays Smart Investor platform lists it as the seventh most popular purchase during the week of 26 June to 2 July.

Alongside the uplift from index fund inclusion, several investment banks have issued positive analyst statements on SpaceX, marking the end of the ‘quiet period’ that typically follows an IPO. Morgan Stanley, Goldman Sachs, UBS and Bernstein Research are among the names backing the stock with ‘buy’ recommendations or equivalent, based on asset strength and long-term growth prospects.

Investment trusts are often a sound investment but picking one that stands out from the crowd can really boost your returns.

So if you’re trying to decide where to invest for the second half of the year it could pay to see which trusts and sectors have outperformed the rest over the last six months.

The top funds and stocks for DIY investors have reflected a slant towards technology so far this year. Investors who followed that trend were rewarded, as technology-focused investment trusts delivered greater returns than any other sector.

According to the Association of Investment Companies (AIC), an industry body representing the UK’s investment trusts, the average investment trust performed better than the UK stock market’s flagship large cap index, returning 9.4% during the first half of the year compared to the FTSE 100’s 5.7%.

Some investment trust sectors generated average returns well above this level.

The top-performing investment trust sectors of H1 2026

Tech was the top-performing investment trust sector, returning over 50% in the first six months of the year.

“The historic boom in AI spending continued to drive returns in the first half of 2026, most obviously in the technology sector,” said Annabel Brodie-Smith, communications director at the AIC.

^{Source: theaic.co.uk / Morningstar. Share price total return in % to 30/06/26.}

Tech and AI might be more heavily represented in the top-performing investment trust sectors than is initially apparent: the theme is also having a significant impact “in Asia and emerging markets where some of the world’s largest AI hardware and microchip manufacturers are based”, said Brodie-Smith.

It has also been a good six months for global small caps, with the sector returning 23.7% on average to make it the fifth-best-performing investment trust sector. The average Japan-focused investment trust, meanwhile, returned 18.2%.

Which investment trusts were the top performers in H1 2026?

While technology was the top-performing investment trust sector overall, the top-performing individual investment trust came from the commodities sector.

Baker Steel Resources (LON:BSRT) returned over 65% in the first six months of the year. The trust is a diversified commodities investment trust; it holds producers of precious metals like gold and silver, but as of 31 March its portfolio has the largest weighting towards tungsten producers – making up 23% of assets.

^{Source: theaic.co.uk / Morningstar. Share price total return in % to 30/06/26.}

Technology is unsurprisingly a recurring sector in the rest of the 10 top-performing investment trusts list. Three of the trusts – Polar Capital (LON:PCT), Manchester & London (LON:MNL) and Allianz Technology (LON:ATT) – are all designated to the technology and innovation sector by the AIC, while Seraphim Space (LON:SSIT) and Schiehallion Fund (LON:MNTN) have significant overlap with technology as a theme.

Asian and emerging market trusts like Pacific Horizon (LON:PHI) also featured amid the AI boom. Pacific Horizon’s top two holdings as of 31 May were chipmakers Samsung and Taiwan Semiconductor.

“The strong performance is extremely welcome, but this is only a snapshot. It is important to remember that investing is a long-term commitment and that any sector or trust should form part of a broader, diversified portfolio,” said Brodie-Smith.

Healthcare is particularly well placed to benefit from artificial intelligence (AI), which is revolutionising data-heavy industries. If there's one thing AI can do better than anything else, it is to sort, analyse and draw patterns from data. And if there is one sector with more data than anywhere else, it's healthcare.

AI tools and increased computing power give us the ability to interpret CT scans in milliseconds; comb through drug-trial data in minutes rather than months; and discover new treatments by analysing hundreds of historical studies. This is unlocking results that researchers could only have dreamed of five years ago.

Moreover, demand for healthcare is unlikely to be hurt by AI. Humans won't stop getting ill as tech gets better. They may even require more healthcare as AI unveils more solutions to previously incurable diseases and extends lifespans.

Yet the market does not seem to care about this healthcare revolution. Investors are going all-in on the market's leading AI companies, but they are ignoring this thematic play.

AI can help healthcare profit margins recover

The valuation of the global healthcare sector is trading broadly in line with its own long-term history, according to broker Panmure Liberum. However, when adjusted for normalised profit margins, it's trading at levels not seen since the 2009-2012 period. That is because margins have fallen from 10% to 6%-7% over the past five years as costs have risen – a trend that AI should help to reverse.

Healthcare sector is trading at a discount

The overall healthcare sector is trading at a discount of roughly 50% to the MSCI All Countries World Index (ACWI) on a normalised earnings basis. That said, in the pharma sub-sector, the opposite is true. It looks cheap on a price-to-earnings basis, but verges on the expensive when margins are adjusted back to historical levels (14% vs 18% today).

Still, both sectors deserve a premium valuation. Over the past ten years, the MSCI ACWI Healthcare and MSCI ACWI Pharmaceuticals sectors have booked revenue growth of 7.6% and 5.9% per annum, respectively, compared with 2.5% for the wider MSCI ACWI. Earnings have grown at 5.9% and 7.1% respectively, against 4.5% for the ACWI.

The best ways to invest in healthcare

One way to play this theme is Worldwide Healthcare Trust (LSE: WWH), managed by specialist investment advisor OrbiMed (over $20 billion in assets under management with a focus on healthcare). The trust has been hurt by its overweight exposure to China and biotech over the past five years, but this paid off in 2025 when it outperformed its peer group by seven percentage points. Over the long term, it has beaten the MSCI World Health Care by 2.3% per year since 2010. The shares are at a 7% discount to net asset value (NAV).

Polar Capital Global Healthcare (LSE: PCGH) is more exposed to the undervalued healthcare sector than to biotech. The trust traded at a discount of about 12% four years ago, but is now trading at a premium and has been issuing shares this year. It has outperformed its benchmark by 39.2% over the past five years. After a restructuring last year, it has leaned into low valuations by adding gearing of £40 million (9.7% of NAV).

RTW Biotech Opportunities (LSE: RTW), the Biotech Growth Trust (LSE: BIOG) and International Biotechnology (LSE: IBT) all sit at the more speculative side of biotech. While they are trading at near double-digit discounts, their positioning means investors should be more cautious.

BioPharma Credit (LSE: BPCR), managed by specialist investor Pharmakon, takes a different approach by making loans secured against companies' drugs and products. It has a great record – just one loan since 2009 hasn't performed as expected. The trust is trading at a 5% discount to NAV and yields 10.9%.

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Scaremongers claim that private credit is an impending financial disaster that will lead to a re-run of the 2008-2009 financial crisis. And in fairness, there is some justification for concern about the sector. “The credit loss cycle is upon us,” said asset manager Pimco earlier this month, warning that some riskier companies will struggle to service their debts.

There is significant exposure to software firms among leading investors in private credit and not all of it is disclosed, as The Wall Street Journal has found. The disruption of software by AI is putting many of their business models at risk. This sector accounted for $500 billion of loans at the end of 2025 (19% of the total), says the Bank of International Settlements.

Defaults are rising and nervous investors have switched to selling. Private credit funds have had to exercise redemption limits to prevent the forced liquidation of investments. Lending is slowing, terms have been tightened and credit spreads have widened.

Don't fear private credit defaults

Yet “it is hard to see how private credit could be a systemic issue for bond markets”, says Pieter Staelens of CVC Capital. After all, private credit accounts for just $3 trillion of the $140 trillion global fixed income market, he says. “The rate of defaults across credit markets has picked up a little recently but there is no red flag.” At close to 2%, it sits below the 20-year average. “The first quarter saw the best earnings on record; with strong earnings, defaults will stay low.”

Besides, defaults are part and parcel of credit investing; avoiding them is not always the answer. “I can run a portfolio with zero defaults if you are prepared to incur a loss in selling a position,” says Staelens. “Credit losses, not defaults, are the key. We are used to defaults, which average 1% each year, so they won't destroy our funds.”

What matters in defaults is what you get back. “We typically recover 80 cents in the dollar in an insolvency,” says Staelens, although this would probably be lower for an asset-light software company. Sometimes these situations can be very profitable. In 2020, CVC took part in the restructuring of Doncasters, a maker of precision parts for aerospace. The firm is set for an initial public offering (IPO) soon and will use the proceeds to repay debts. CVC “will receive way more than we invested”.

Get paid for the risks in the private credit market

“There is a lot of misperception about how risky the credit market is,” says Staelens. Of course, there are risks: default, foreign exchange, liquidity, inflation, early repayment, duration and interest rates. However, the aim is not to avoid risk, but “only take exposure when you are paid for the risk”.

Private credit has been one of the fastest-growing sub-sectors, so some fallout from that boom is likely. “Some people probably cut corners in assessing risk. Any asset class that grows quickly will see wobbles along the way but it won't disappear. Bad risk management rather than structural risk is the problem. You need to invest with people who know what they are doing.”

CVC is sceptical of credit-rating agencies, “which are too backward-looking to be helpful”, he says. “A large part of what we do is working out where credit ratings are wrong. Much of the market, especially passive funds, invest according to the agencies' ratings.” That means a debt downgraded to CCC and now trading at 50 cents in the dollar – as a result of forced selling by funds that are no longer allowed to own it – could be a great opportunity.

CVC Income & Growth (LSE: CVCG) trades at net asset value (NAV) and yields 8.5%. Rivals such as Invesco Bond Income Plus (LSE: BIPS), M&G Credit Income (LSE: MGCI), CQS New City High Yield (LSE: NCYF) and TwentyFour Select Monthly Income (LSE: SMIF) have similar 7% or 8% yields. CVC leads the pack with a return of 61% over five years, far above what government bonds have delivered. Don't be put off by the scaremongers.

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The 2020s have swung investors between exuberance and despair. What this decade has reminded us is that markets are driven by forces that are nearly impossible to predict and that genuine diversification, not just across firms or geographies but also asset classes, styles and valuation, is the most reliable basis for long-term returns.

Diversification is famously the only free lunch in finance and its value goes beyond performance: portfolios built to withstand drawdowns also protect investors from the emotion-driven decisions that volatile markets so often provoke.

With a wave of mega-cap initial public offerings expected to deepen the S&P 500's already significant concentration in AI and technology, now is the time to ask: how truly diversified are you? Our VT Chelsea Managed Funds range is built on exactly this principle, blending active and passive strategies across asset classes and geographies with a valuation-conscious approach and no obligation to follow benchmarks. Here are three holdings that show how we stay diversified across all market conditions.

Three funds to consider

Despite its global remit, the Ranmore Global Equity fund holds just 5% in technology and 25% in North America, vastly underweight compared with the index on both counts. Manager Sean Peche, who has more than 25 years of experience, tilts towards businesses with pricing power and recurring demand.

The fund has higher exposure to sectors such as consumer discretionary, consumer staples and communication services. The fund trades on 8.8 times forward earnings against 19.3 times for the index, and offers a yield of 4% compared with the index's 1.7%. In 2022, when growth and technology stocks sold off sharply, Ranmore delivered positive returns.

Ironically, it is the so-called “Jurassic Park” industries such as mining that may be among the best positioned to benefit from the AI revolution rather than be disrupted by it. You cannot commoditise what has already been commoditised and you cannot conjure a copper mine out of thin air. Meanwhile, the build-out of AI infrastructure, from data centres to robotics, is driving an explosion in demand for the very materials the BlackRock World Mining Trust (LSE: BRWM) holds.

Copper, one of its largest exposures, is essential to electronics, data centres and electrification, and AI-driven growth in global GDP is only expected to accelerate that demand further. Managed by one of the most experienced teams in the sector, the trust spans everything from explorers and developers to major diversified producers across gold, copper, iron-ore and platinum-group metals, with an attractive dividend on top. Natural resources and mining equities have a historically low correlation to technology stocks and real assets often outperform when stretched tech valuations come under pressure.

UK smaller companies are currently experiencing their longest period of underperformance in years, yet over most long-term timeframes, small caps have outperformed their larger counterparts. UK small caps are where some of the best value available in global equity markets is right now and overseas investors have been quicker to recognise it than many at home. Philip Rodrigs, a decorated UK small-cap manager with sector-leading returns dating back to 2006, runs WS Raynar UK Smaller Companies with a high-conviction, bottom-up approach targeting firms with strong growth potential, improving margins and share prices trading well below intrinsic value.

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At the annual meeting of Edinburgh Worldwide (LSE: EWI) at the end of April, Saba Capital was at last successful in ousting the trust's directors and replacing them with their own nominees. The US activist had a 30% shareholding in EWI and gained the support of a couple of other sizable investors, and the board was unable to summon a high-enough turnout from the rest of the shareholders to win.

Saba objected to an ill-conceived proposal to merge Edinburgh Worldwide with its sister trust Baillie Gifford US Growth (LSE: USA), which also has Saba as a 29% shareholder. More importantly, it was furious that EWI cut its stake in SpaceX by 35% in October, shortly before the rocket and satellite firm's valuation doubled to $800 billion. Saba demanded to know whether this decision was made by the board or Baillie Gifford.

An obvious answer for Edinburgh Worldwide

The new board says it will now launch a review into Edinburgh Worldwide's “historic significant portfolio activity and related decision-making processes”. Yet the answer seems obvious. Two other trusts managed by Baillie Gifford made more modest reductions in their holdings – USA and Schiehallion (LSE: MNTN) – while Scottish Mortgage (LSE: SMT) made none. If this were a Baillie Gifford decision, all would have sold equally. Almost certainly, Edinburgh Worldwide directors thought their holding in SpaceX was too large and asked to sell. Baillie Gifford would then have offered other trusts the opportunity to reduce. Some did, others didn't.

A wiser board would have asked Baillie Gifford for advice, followed it, and sold none, or only a small proportion. For that mistake, the directors were rightly ousted. But dismissing Baillie Gifford, who bought the stake in the first place and were unwilling sellers of any of it, would be a terrible mistake.

In the last year, Edinburgh Worldwide shares have returned 70%. The discount to net asset value (NAV) has shrunk to 1%. The NAV return has been 60%, far ahead of market indices, and is rapidly recovering the underperformance of prior years. Strong performance is very likely to continue.

Saba's mooted alternative strategy makes no sense. It wants to take over as manager and use Edinburgh Worldwide to invest in other investment trusts that are trading at large discounts to NAV. The problem is that discounts have fallen to single digits on average and are lower for trusts invested in quoted equities. Higher discounts remain at trusts with illiquid assets, with excessive gearing or where the trust is under the thumb of a controlling shareholder. There is no easy money to be made from activist campaigns against these trusts. Saba did well to invest in the sector, but the opportunity has now gone and is unlikely to reappear for many years.

What will Edinburgh Worldwide do next?

So what will the new directors do? The message is muddled. They say they will “continue to work closely with Baillie Gifford regarding the company's holding in SpaceX and potential future liquidity initiatives”. They promise a tender offer after SpaceX's initial public offering (IPO). With the shares trading so close to NAV, this is unnecessary. In any case, Edinburgh Worldwide will be locked into its SpaceX holding for six months after the IPO, so “working closely with Baillie Gifford” implies retaining it as manager for now.

They propose appointing new directors, which will be difficult without clarity on the manager and strategy. The best solution is surely to renew the agreement with Baillie Gifford and let it get on with the job that it was doing rather well.

That would make Saba's activist campaign completely pointless. It might cause Saba to call another extraordinary general meeting to seek to replace the directors it has just appointed. But it is more likely that Saba would just sell its stake at a large profit and walk away. Let's hope the new board shows that its claim to be independent of Saba is for real.

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Global flows into exchange-traded products (ETP) fell slightly during May compared to the previous month, according to analysis from asset manager BlackRock.

Purchases of ETPs – which mostly comprise exchange-traded funds (ETFs) as well as some similar products – fell to $199.4 billion in May, from $212.4 billion the previous month.

The dip was driven mostly by a sharp fall in equity fund inflows, which dropped to $106.4 billion – the lowest month for global equity ETP inflows since January.

Similarly, analysis from investment research firm Morningstar found that European ETF and ETC flows fell from €40.2 billion in April to €38.0 billion in May.

“Investor demand for ETFs remained resilient in May, even as flows moderated slightly from April’s peak,” said Jose Garcia-Zarate, senior principal at Morningstar. “Equities continued to dominate allocations, supported by strong market performance and sustained interest in US exposure.”

Which ETP sectors saw the largest flows during May?

Recent analysis of the most popular funds and stocks with DIY investors on Interactive Investor revealed a split between cautious strategies and risk-seekers, a trend also borne out by BlackRock’s analysis.

While fixed-income ETPs recorded their largest month of inflows on record ($87.7 billion), suggesting a cautious market, within equity ETPs technology was the most popular sector, attracting $14.4 billion of inflows.

Besides tech, the only sectors to record meaningful inflows were industrials ($2.7 billion) and energy ($1.5 billion), according to BlackRock.

Morningstar’s data also pointed towards high demand for tech ETFs. Garcia-Zarate attributed much of this demand to the forthcoming SpaceX IPO.

“VanEck Space Innovators ETF (LON:JEDG) [was] among the top 10 flow-gathering ETFs in May,” he said.

Unsurprisingly given the demand for tech-focused ETFs, funds targeting the US saw the largest inflows. Of regionally focused ETPs, BlackRock’s analysis found only those targeting the US received positive flows – and even these dipped to $103.3 billion, from $121.9 billion in April.

Emerging market equity ETPs saw monthly outflows of $40.4 billion, the largest negative flows of any region’s ETPs.

UK REITs – real estate investment trusts – have drastically underperformed the wider market over the past year. The FTSE All-Share index excluding investment trusts has produced a total return of around 22%, while industrial REITs – the largest group in the sector – has returned just 6.8%, mostly from income.

However, while investors are clearly not interested in the sector, trade buyers and private equity are. Five years ago, there were 82 listed REITs. More than half have since been acquired or liquidated. Private-equity giant Blackstone has been especially active, first taking out St. Modwen Properties and Industrials REIT. It then beat Tritax Big Box (LSE: BBOX) in a battle for Warehouse REIT, before selling assets to Tritax in exchange for a 9% stake.

The trend looks set to continue. Earlier this year, British Land (LSE: BLND) acquired Life Science REIT. More recently, LondonMetric Property (LSE: LMP) – which has completed several deals in recent years – and Schroder Reit (LSE: SREI) have teamed up on a bid for Picton Property Income (LSE: PICT), although the outcome remains unclear. Last week, some of Picton's shareholders told the Investors' Chronicle that they are unhappy with the proposed terms.

Unwarranted discounts on UK REITs

Derwent London (LSE: DLN) offers one of the best examples of value in the sector. The company owns a portfolio of high-quality offices in central London and trades at a 47% discount to net asset value (NAV), with a 4.6% yield. In an attempt to close the discount, management recently announced a £50 million share buyback, signalling it believes this is a better use of capital than buying additional assets. You can't criticise management for buying back stock – it's the equivalent of buying a new building at a 50% discount.

Yet it's clear that something has gone horribly wrong in this market, given that London is set to run out of high-quality office space within the next few years and rents are breaking records.

Grainger (LSE: GRI) offers another example. This is one of the largest residential landlords in the country and can't build new properties fast enough to meet demand. It has consistently reported an occupancy rate in the high 90s and last year recorded overall rental income growth of 7.8%. Yet the shares have fallen 29% over the past 12 months and now trade at nearly 50% discount to NAV, with a yield of 5.4%. Mike Ashley, founder of retail group Frasers, has been buying as others are selling. He owns just under 5% of the company via derivatives.

The value catalyst

Other examples include the likes of Great Portland Estates (LSE: GPE), which is trading at 60% of NAV (it focuses on development more than income, so has a lower 2.7% yield). Even relatively popular REITs such as LondonMetric and Supermarket Income (LSE: SUPR) are trading at around 90% of NAV, with yields of around 7%.

In general, UK REITs are changing hands at some of the lowest valuations in recent memory. Yes, they could get cheaper, but sooner or later they are just going to be too good for trade buyers and private equity to pass up. This should be compelling for value investors, since value investing works best if there is a clear potential catalyst to realise that value. Given the continued liquidation of the London equity market, it could only be a matter of time before every remaining deeply discounted REIT gets taken out.

If and when that occurs, investors who buy at today's valuations could see attractive capital gains. In the meantime, while they wait they can pick up dividend yields of 5%-7% – in many cases derived from long-term contracts with high-quality tenants.

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After a long run trading on double-digit discounts, fortunes look to have turned for the UK investment trust sector.

Latest data from the closed-ended fund sector trade body, the Association of Investment Companies (AIC), reveals the average discount to net asset value (NAV) across all UK investment trusts reached single digits for the first time in nearly four years, narrowing to 9.6% on 31 May.

Comparing month-end figures, this is the first time the average discount has been less than 10% since August 2022, when it was 9.4%.

Those wider discounts were due to higher interest rates, regulatory issues around cost disclosures and the dominance of US big tech companies – especially the Magnificent 7.

After a challenging period for investment trusts, there is now “light at the end of the tunnel”, according to Richard Stone, chief executive of the AIC.

“The sector has reshaped itself over the past four years with unprecedented levels of M&A and share buybacks, as well as mandate changes and fee cuts to give shareholders a better deal,” he said.

Stone added that while the challenges were not over, to see the average discount return to single digits was encouraging.

He said: “This reflects the continuing appeal of the investment trust structure, which can offer exposure to virtually any asset from mainstream stocks and shares to exciting private companies such as SpaceX.”

What is an investment trust discount?

Because investment trusts are closed-ended investment vehicles – listed companies whose shares trade on a stock exchange – they have certain features that set them apart from traditional open-ended collective funds. One of these features is their share price being able to trade at a premium (higher) or a discount (lower) than their total net asset value (NAV) per share.

An investment trust’s NAV is the value of the trust’s assets minus any liabilities. This is then divided by the number of shares to get the ‘per share’ number, which is then compared to the actual share price to determine if the trust (or company) is at a premium or discount.

These typically indicate whether demand for the shares is high or low at any given time.

Doug Brodie, chief executive of Chancery Lane Retirement Income Planning, gives the example of an investment trust with a market capitalisation (market cap – the combined value of all its shares) of £50 million, but the assets it holds are worth £55.5 million.

“The market cap – the share price – is at a 10% discount to the value of the assets it owns – the NAV… A discount is simply a price off the normal price: instead of paying 100p in the pound for shares, you only have to pay 90p for them.”

Why do discounts widen or narrow?

The discount on an investment trust can narrow for several reasons. These include improved performance, increased popularity of the sector it sits in, a change in manager or other corporate activity, such as a merger with another trust, or being acquired or liquidated.

In the latter case, the assets have to be sold or absorbed into another vehicle, meaning their actual value – minus costs – is likely to be realised. A rise in corporate activity has contributed to discounts narrowing.

Further, Max King, former fund manager and MoneyWeek columnist explained that discounts are wider for trusts with unquoted assets than for those with quoted assets.

Shares in private companies don’t trade daily on stock exchanges, so their value is only determined at intermittent events when they are bought or sold. When an investment trust holds these shares, it usually values them based on the most recent valuation event – which might be out of date compared to the market’s assessment of their current worth. That can contribute towards discounts or premia to NAV.

Because private equity valuations are backward-looking, they tend to hold up when markets are falling and pick up when they’re rising.

“Hence discounts widen as investors realise they are unrealistic and fall when investors realise that valuations have become conservative,” said King.

What do narrower discounts mean for investors?

According to King, discounts appear for three reasons: poor performance; distrust of the net asset value – especially for unquoted assets; or rapid sell-off of UK-listed equities, as witnessed in the past few years.

As investment trusts are UK-listed companies with their own shares often listed on the major indices, if there’s an exodus from the UK market, it will inevitably hit UK-listed trusts as well – even if their underlying companies are global.

He warned against being seduced by wide discounts, adding that investors should instead focus on underlying performance, and be sure to understand why a discount exists and why it might come down before deciding to invest.

“Investors in the UK have been bizarrely risk-averse in recent years,” King added. “That is diminishing so, in time, discounts will disappear, existing trusts will issue more equity, new trusts will be launched and investors will be euphoric – that will be the time to turn cautious.”

Why discounts matter for income investors

Narrowing discounts also suggest that investors are seeing the value of long-term holdings, for which Chancery Lane’s Brodie said investment trusts were “the perfect vehicle”.

He added that for income-seekers, discounts become even more valuable, giving the example of M&G Investments.

“If M&G shares are yielding 6.48%, you can buy a trust that holds them and if that trust is on a 10% discount, your investment yield on those shares is actually 7.2%.

“If a trust is at a discount, even without any underlying stock market growth, its share price should, over time, grow back to match the actual value of the assets.”

Anthony Bolton remains a legend among fund managers. In the 28 years in which he managed the Fidelity Special Situations Fund, he generated a compound investment return of 19.5% – 6% ahead of the market. His style was primarily contrarian, investing in stocks ignored or disdained by most investors.

When he stepped down in 2007, the fund was split into two: one investing in the UK and one internationally. Thereafter, the funds left the limelight under a succession of managers, but there are strong signs of an upturn.

The UK fund that retains the Fidelity Special Situations name – and the Fidelity Special Values (LSE: FSV) investment trust that follows the same strategy – has steadily outperformed the UK market for the last three years under managers Alexander Wright and Jonathan Winton. More recently, the Fidelity Global Special Situations Fund is also outperforming, with a 19.1% return in sterling in 2025 compared with a 13.9% return for the MSCI ACWI index.

Today, the global fund is “style agnostic”, says Christine Baalham, who took over as co-manager with Tom Record in 2024. Still, it is driven by stock selection rather than broader factors. “I'm not going to pretend I can call the market outlook,” she says. “I could be fabulously optimistic or terribly pessimistic depending on which view of the world I go for. There are reasons to be excited and reasons to be fearful.” Few managers put it so well.

Growth is sought “where the opportunity is much greater than the market believes”, but Anthony Bolton's search for contrarian ideas with hidden value is not neglected. Take Bayer, which is covered by pharmaceutical analysts who hate the agricultural sciences half of the business, says Baalham. Not only does Bayer have “some really good pharmaceutical products”, but “the crops business is nearing a resolution of litigation and includes a high-quality seeds business”. It trades on less than nine times earnings.

Fidelity Global Special Situations Fund: rewards in bottlenecks

The Fidelity Global Special Situations Fund portfolio is diversified: none of the 88 holdings is above 3%. The fund's 2% holding of Nvidia was 2.7 percentage points underweight at the end of the quarter and it didn't hold Apple (which is 4.2% of the index) at all: the stock is trading on nearly 30 times earnings, notes Baalham. This could be a problem for relative performance in the current quarter, given Apple's 30% gain and Nvidia's 14% gain. But Baalham says their AI exposure is covered with other holdings. “The rewards are in the bottlenecks,” she says, “which are memory and power.” The launch of Playstation 6 has been delayed by a shortage of memory chips – hence a holding in chipmaker Samsung. Data centres are creating more demand for energy, so the fund is invested in Siemens Energy as well as NextEra and SSE. However, “we keep an eye on quantum computing”, which has the potential to significantly reduce power requirements.

Another bottleneck is in analogue semi-conductors, which manage the interface between humans and machines. “With no spare capacity, prices will rise when demand in these markets picks up.” A holding in STMicroelectronics is based on this thesis. “We are finding some really interesting ideas caused by technology advances while other investors seem to be focused on geopolitics.” Conversely, the fund is neutral on oil and gas, although it holds US producer Diamondback Energy, services company Baker Hughes, and liquefied natural gas exporter Cheniere Energy.

As in Anthony Bolton's time, the close relationship between managers and analysts is a key strength at Fidelity. Record and Baalham are supported by a global team of 139 equity analysts. They oversee £3.6 billion in Global Special Situations, plus another £6 billion alongside.

It's a pity that the duo don't also run an investment trust, since these tend to outperform sister open-ended funds run by the same manager. Directors of serially underperforming global trusts, take note.

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Until recently, one could have argued that the fall in investment trusts’ discounts to their net asset value was the result of trusts shrinking their capital faster than investors were exiting. According to the Association of Investment Companies, the average discount excluding 3i fell from 15% to 12.5% in 2026. The FTSE All-Share Closed End Investments sector returned 16.1%, but total assets fell £3 billion to £265.5 billion as buybacks of £10.2 billion (36% higher than in 2024) and a record 27 mergers, acquisitions and liquidations (£9.5 billion of money out) dwarfed the £530 million of fundraising by existing trusts. There was only one new issue, which raised £53 million for a vulture fund.

Although performance had improved and discounts fallen from the peak of 18% reached in late 2023, activist investors, notably Saba Capital, were maintaining the pressure on investment trusts and further contraction seemed inevitable, without markets necessarily providing support. “Alternatives” funds such as infrastructure, property and private equity had the widest discounts and “further corporate activity looks inevitable”, wrote Chris Brown of JPMorgan Cazenove, “while initial public offerings will continue to be a challenge”.

A steadily improving outlook for investment trusts

This year has seen a steadily improving outlook for investment trusts. Average discounts, according to Deutsche Numis, have fallen to 11.1%, with “half” the sector “by number below 10% versus 37% in January 2025”. Discounts for equity investment companies have fallen from 9% to 7%, but the fortunes of alternative funds have been mixed; 3i has fallen from a premium of 43% late last year to a discount of 16%, but Seraphim Space has gone from a once-large discount to a large premium.

In the first four months, the sector returned 4.7%, with 88% of funds delivering positive share-price total returns and 89% positive investment total returns, according to Winterflood Securities. Corporate activity has continued, with £4.4 billion of capital having been returned so far this year, says Deutsche Numis – but most of this came from proposals announced last year, notably the transition of Smithson into an open-ended fund. Strategic reviews at European Opportunities, Pacific Assets and Schroder BSC Social Impact are ongoing, but these are more likely to lead to mergers with other trusts than liquidations.

Of the £4.4 billion, the figure for buybacks was £1.7 billion in the first quarter, down 38% from the first quarter of 2025. Scottish Mortgage “led the way” for buybacks in the first quarter, but moved to a premium in April and has since re-issued shares. It is not the only one. Temple Bar is re-issuing shares previously bought back, and so is, among others, Ecofin Global Utilities and Infrastructure (of which I am a director). Share issuance in the first quarter of £303 million was up 78% year-on-year and has continued to pick up with £248 million issued in April and Seraphim Space raising £137 million in May.

The opportunities for vulture funds such as Saba in the trusts invested in equities are now very limited. Saba has chosen to exit from Herald, but seized control of Edinburgh Worldwide after a misguided proposal by Edinburgh Worldwide to merge with Baillie Gifford US and the appearance on the former's register of a couple of large shareholders friendly to Saba. Saba appears to want to manage the trust itself and use it to invest in other trusts trading on discounts, a strategy that is likely to be much less rewarding than continuing with that currently managed by Baillie Gifford.

The focus of the vulture funds is now on the “alternatives” trusts whose investments, in private equity, are illiquid. The valuation of private equity lagged listed equities on the way down and is now lagging on the way up. Better performance of the underlying investments is starting to come through, leading to lower discounts. Infrastructure and property funds have been hurt by rising gilt yields, but a peak is probably not far off and underlying performance is resilient.

Ignore the 'Eeyores'

The buyers returning to the investment-trust market are mostly retail investors; many wealth managers remain disdainful, having sold out when discounts were wide. The recovery is still in its early stages, with no new issues this year and none visible. It could be reversed by the drop in markets, which the Eeyores are predicting and hoping for. They will be dismayed by the fact that market guru Ed Yardeni – one of the very few strategists to have been proved right in recent years, upgrading his target for the S&P 500 this year from 7,700 to 8,250 on the basis of very strong earnings growth – expects nearly 20% growth this year and nearly 14% next, below the Wall Street consensus. His decade-end target is 10,000.

Investment trusts tend to outperform in rising markets, which leads to falling discounts. The sector's recovery has a lot further to go and will bring significant expansion.

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At the end of last year, Murray Income Trust (LSE: MUT) announced it had decided to drop Aberdeen as its investment manager and replace it with the team behind the top-performing Artemis Income Fund. The change was desperately needed.

The shares delivered a total return of just 26.9% over the five years to 19 November 2025, putting Murray Income firmly at the bottom of the UK equity income investment trusts sector rankings. Over the same period, the FTSE All-Share index returned 70.9%. Meanwhile, the Artemis Income Fund, managed by Andy Marsh, Nick Shenton and Adrian Frost, has outperformed the UK equity-income fund sector by around 1.70 percentage points per year over the past ten years.

The growth of this fund – which now has assets of around £5.3 billion – has been fundamental to Artemis's success. At the end of the first quarter, the boutique reported approximately £41 billion in assets under management, up from just £28.5 billion at the end of 2024.

Murray Income has now become the second trust mandate that Artemis has won. It also took over the Invesco Perpetual UK Smaller Companies Investment Trust – renamed Artemis UK Future Leaders – in 2025.

Murray Income's new portfolio

The Artemis team officially took over the Murray Income portfolio at the beginning of March. They swiftly restructured all of the trust's holdings to mirror Artemis Income's portfolio.

At the end of 2025, Murray's top-five holdings were AstraZeneca, National Grid, Unilever, RELX and TotalEnergies, which together accounted for 21.6% of the portfolio. These have now been replaced by Tesco, GSK, Lloyds Bank, NatWest and Aviva, which make up a similar 23.6% of the total.

The key difference between the new Artemis approach and the former Aberdeen strategy is a focus on cash flow rather than yield. The team uses free cash flow to assess how much cash a company generates and whether its dividend is sustainable. They concentrate on companies that they believe have the best potential for free cash-flow generation, overall shareholder yield (they like companies that can buy back stock as well) and long-term growth.

Comparing the old and new portfolios illustrates the difference in approach. The new portfolio is trading at a free cash flow yield approximately 50% higher than the old portfolio, based on Morningstar's data.

The top-five holdings in the Artemis portfolio also yield around 1.7 percentage points more on average compared with the Aberdeen portfolio. All in all, the new holdings are cheaper, generate more cash and offer a better overall shareholder yield. That should help the trust maintain its 52-year record of dividend growth, which has earned it “Dividend Hero” status from the Association of Investment Companies (AIC).

The future looks bright for Murray Income

While Marsh, Shenton and Frost are new to Murray, they are not new to income investing. If their record at Artemis Income is anything to go by, the trust has an exciting future.

Investors who already back their existing open-ended fund may want to consider which vehicle is likely to offer the best returns. Recent research from the AIC found that a solid majority (77%) of investment trusts have outperformed open-ended funds run by the same manager over ten years, with average excess returns of 1.3 percentage points per year.

The new managers are already capitalising on a key difference between investment trusts and open-end funds by deploying leverage to enhance returns. The trust has a leverage targeting of 8%-10%, and borrowings stood at by the end of March.

At a 7% discount to net asset value (NAV) and yielding 4.3% (versus its open-ended peer's 3.5%), Murray Income now offers cheap exposure to a sector-leading strategy.

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Scottish Mortgage has confirmed its holding in space exploration start-up SpaceX is valued below the level the firm is rumoured to be targeting at its upcoming initial public offering (IPO). That could potentially mean an uplift in Scottish Mortgage’s value at the time of the listing, if SpaceX achieves the rumoured price tag, though experts caution that IPOs can be volatile and unpredictable periods.

Managed by Baillie Gifford and one of the UK’s most popular investment trusts, Scottish Mortgage (LON:SMT) invests in innovative companies in which it sees the potential for long-term growth.

As of 30 April, SpaceX – one of the major players in the burgeoning space economy – is Scottish Mortgage’s largest holding, accounting for 18%% of the portfolio.

“Scottish Mortgage first invested in SpaceX in December 2018, deploying capital through to August 2021, with a total investment of £151 million (approximately $200 million at the time of purchase),” said Tom Slater, manager of Scottish Mortgage. Despite no additional capital having been invested since then, Slater confirmed that “SpaceX has been the trust’s largest contributor to returns over one, three and five years, and the fifth‑largest contributor over 10 years”.

Since SpaceX is a private company, its shares don’t trade daily like those of a listed company. That means its value doesn’t fluctuate day by day; instead, it changes intermittently during specific ‘liquidity events’, when insiders sell shares on private markets.

SpaceX is expected to list later this year, and, according to reports, could target a value as high as $1.75 trillion. While this valuation hasn’t yet materialised – and may not, depending on what happens when the company lists – there is an expectation within the market that it could soon be worth this much.

That poses a conundrum for funds and investment trusts that hold its shares. What are they really worth – their level at the company’s last liquidity event, or its rumoured value at a future IPO?

Scottish Mortgage reveals SpaceX valuation

Scottish Mortgage confronted this question in a briefing note on 12 May clarifying that, as of 31 March 2026, the trust values its SpaceX holding based on a $1.25 trillion valuation. This follows “a revaluation during the first quarter as secondary market transactions were rebased to reflect the merged valuation of SpaceX and xAI” – the latter being the artificial intelligence start-up founded, like SpaceX, by Elon Musk.

The trust also clarified that its valuations for SpaceX and other private companies it holds are based on “verifiable transactions rather than market commentary or press speculation” and that they are determined by Baillie Gifford’s valuations team as well as an independent third-party provider, S&P Global.

Even at this valuation, SpaceX has delivered excellent returns for Scottish Mortgage since its initial investment.

“As at 31 March 2026, the holding was valued at £2.98 billion (approximately $3.94 billion), representing an increase of around 19 times the original investment,” said Slater.

But given the rumoured IPO valuation is 40% higher that the trust is currently marking them, could a value bump await Scottish Mortgage shareholders as and when SpaceX lists?

How might a SpaceX IPO impact Scottish Mortgage?

It’s hard to say how a SpaceX IPO could impact the investment trust. For one thing, Scottish Mortgage made it clear in the briefing note that at this stage there is no clarity over what restrictions may apply to existing shareholders post‑listing. They could be subject to a lock-up period – a defined period after a company IPOs, usually 90-180 days – during which major pre-existing shareholders are not allowed to trade their shares.

“Even if SpaceX shares jump to the rumoured IPO valuation level, the Scottish Mortgage management team may not be able to take profits initially,” said Ben Johnson, senior analyst at investment manager Charles Stanley. “The team have made their peace with this and have communicated this clearly.”

The market may also have started to price future gains in already. While the average UK investment trust trades at a discount to its net asset value (NAV) of around 12%, Scottish Mortgage trades at a premium of around 3.5%.

This probably reflects broad optimism over the trust’s strategy, which leans heavily into growth and tech stocks, according to Chris Beauchamp, chief UK market analyst at investing platform IG, but could also in part reflect the market’s expectation that its SpaceX holding might soon increase in value.

But Beauchamp also cautioned that there is a risk of volatility following any tech IPO.

“It’s a different world once you’re a public company,” said Beauchamp, thanks in large part to increased scrutiny over business fundamentals.

Companies like Meta (formerly Facebook) and Musk’s own Tesla endured share price declines in the aftermath of their respective IPOs.

“The risk with IPOs is that people [who have already invested in the company] are looking for an exit,” said Beauchamp. “There’s so much wealth tied up in it they want to realise, understandably.” This can lead to a high appetite to sell.

“Investors should expect significant volatility in the Scottish Mortgage share price during and after the IPO,” said Johnson. “The trust has never had such a big weight in a single name.” He highlighted, though, that the last company in which the trust had a high double-digit weighting was Tesla, “which proved to be one of its most successful ever investments” over the long term.

You might expect the £219 million Guinness Sustainable Energy Fund to have performed poorly in recent years, given the dreadful performance of renewable-energy infrastructure funds. Far from it: the fund returned 18% in 2025 after losing 17% in the previous three years, but returning 150% in the three before that.

That is because its portfolio is much broader. While the renewable infrastructure funds invest in just a few energy-generation projects, the Guinness Sustainable Energy Fund is spread across quoted companies in the equipment, efficiency, electric vehicles, power generation, batteries and infrastructure sectors.

Last year's returns were due to improving policy clarity, lower interest rates and surging power demand, not just from data centres and digital infrastructure but also from transport, building, industry and the re-shoring to the US of manufacturing, says co-manager Jonathan Waghorn. “Global investment in clean energy in 2025 was $2.2 trillion, twice as much as in fossil fuels, reflecting the fact that renewable energy is the cheapest form of electricity in most situations,” he notes. “Growing power demand has taken over from decarbonisation as the central secular theme.”

Capitalise on the rising demand for electricity

The International Energy Agency forecasts that electricity demand will grow at 3.7% in 2026 – well above the 2015-2023 average of 2.6% – and at 4% per annum thereafter. AI and data centres currently account for 4%-5% of US power demand, but this will grow to around 12% by 2030. Electric vehicle (EV) sales are expected to increase by 4 million to 25 million in 2026 (when they will make up 29% of total sales). Battery prices fallen 93% since 2010, but are likely to drop significantly further by the 2030s. In China, which accounts for 60% of global sales, EV sales are already over half the total. In the US, they are just 10% (against 20%-25% in Europe) due to cheap gasoline and range anxiety in a country where driving distances are longer, but this is expected to increase to 45% by 2030. Policy support has been inconsistent but changes in Donald Trump's “One Big Beautiful Bill Act” last year were not as adverse as many feared.

China added 430GW of renewable capacity in 2025, more than the rest of the world put together, and hit its 2030 target six years early. Approvals for new coal-powered plants have slowed – Waghorn says that global coal-fired generation is at a peak and expects it to halve by 2050. He expects gas-fired generation to continue to grow until 2040, then decline slightly. Renewable energy's market share of energy demand will increase from 15% to 40% as electricity's share of total energy increases from 25% to 40% in 2045.

“Given the growth in electricity demand, it is no longer about renewables or fossil fuels, but about both,” says Waghorn. “Not only is renewable capacity cheaper but costs are falling and lead times for installation are shorter than for gas, whose costs are rising. Gas-fired generation will still have a very important role, providing base load capacity and smoothing out the intermittency of renewable energy. Nuclear power will be slower to expand as expertise needs to be built up.”

“There is significant scope for energy efficiency gains, enabling overall demand growth to slow from 2% to 1% per annum long term.” Growth in electricity demand requires a doubling in expenditure to $600 billion per annum by 2030 and a further increase to $800 billion by the 2040s. “Much of the Western world's power grid is 40-50 years old, and over half of US grid transformers are 30 years old. Estimates point to a doubling of the global power grid by 2040.”

All this adds to the investment opportunity, reflected in the breadth of the fund's portfolio. It makes the funds focused solely on renewable energy projects – with high sunk costs and facing falling wholesale prices – look stuck up a cul-de-sac. Despite this, the portfolio still trades on a 12% discount to the broader market – with higher earnings growth, estimated at 12.7% per annum in 2024-2027 and above that of global markets, there is surely plenty more upside to go for.

An energy fund for a world that still needs oil

The oil and gas sector was a popular contrarian tip for 2026, largely because it had performed so poorly for so long. With the Brent oil price stuck at $65 a barrel, the dollar weakening, demand weak and plenty of potential additional supply visible, the argument for the sector did not look compelling. Yet the Gulf war changed all that, with the oil price surging to over $100 a barrel. Oil and gas companies are back in favour, with the Guinness Global Energy Fund returning 41% in sterling in the first quarter. So is it too late to jump in?

Oil looks expensive relative to recent prices but it was a “cheap commodity and at a 100-year low relative to the gold price”, says co-manager Will Riley. “The world was paying just 2% of GDP for its oil compared with a 30-year average of 3%, and 5% in 2012.”

The International Energy Agency has reduced its estimate for growth in demand from 0.73 million barrels per day (bpd) in 2026 to an average fall of 80,000 bpd. In the longer-term, oil demand, which stood at 104 million bpd in 2025, was previously forecast to peak at 107 million bpd in the 2030s. That peak may be brought forward if higher prices now provide an incentive to shift from oil at the margin, but demand is expected to decline only slowly.

The closure of the Strait of Hormuz theoretically prevents 20 million bpd of oil and 10-11 billion cubic feet of gas per day reaching markets. Alternative pipelines can transport some of this oil, but only some. While high prices will stimulate new investment – both in new production and new transport infrastructure – that will take time. There is no simple alternative to replace Qatar's 20% of global liquefied natural gas (LNG) production, for example. On a longer time scale, there is potential for additional oil and gas supply around the world, which can partly offset the depletion of existing fields. This includes Venezuela, which has the world's largest oil reserves and whose heavy (and costly to extract) crude has a breakeven point of at $80 a barrel, estimates consultancy Wood Mackenzie. However, “under-investment, infrastructure decay, sanctions and loss of technical capacity will take years to rebuild even if political stability and foreign investment returns”, notes Riley.

The Guinness Global Energy Fund had returned a respectable 9% in sterling last year, before oil prices rose – comfortably ahead of the sector, though it had lagged badly over five and ten years. This explains why the fund had shrunk to £125 million, though it is now up to £240 million. Last year's performance was driven by the focus of companies on cash flow and returns on capital, says Riley. Integrated European majors, notably BP and Shell, have been good performers “as they tilted away from renewable energy to fossil fuels”. Canadian companies have also done well as the government U-turned towards fossil fuels.

At the start of the year, the Guinness Global Energy Fund portfolio was trading on a trailing price/earnings (p/e) ratio of 12.8, a 40% discount to global equities, with little prospect of growth in earnings and cash flow if prices remained flat. However, an $80-$90 Brent oil price will add 65% to earnings, says Riley. Even after recent share-price gains, that will bring the fund's p/e ratio back down to about 13 times, compared with a long-run average of 15. Rising earnings also enable firms to pay down debt while distributing higher dividends, making share buybacks and still funding more investment.

The crucial consequence of the Middle East crisis is that the world has been reminded of the risks of supply disruption. This is likely to result in significant investment in new production to reduce dependence on the Gulf, actively encouraged by governments. That is good news for oil and gas companies with the necessary capital and expertise. Professional investors, who neglected the sector for so long, will be looking for an opportunity to invest. So should retail investors.

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Aberdeen Investments has struck an agreement with activist hedge fund Saba Capital to takeover management of the Herald Investment Trust (LON:HRIL) in a move that will preserve its strategy.

It comes as Saba has been building a sizeable stake in numerous UK investment trusts since late 2024 in an attempt to restore closed-ended funds with large discounts to net asset value that it believes are underperforming.

Just last week, Saba landed its first victory in its ongoing attempts to displace the boards of several investment trusts by securing control of Edinburgh Worldwide (LON:EWI).

Herald Investment Trust has also been one of its primary targets in recent years but the new deal with Aberdeen Investments means Saba will now end its interest and exit the fund.

A stock market updated from Herald Investment Trust confirmed a proposed tender offer from Aberdeen for up to 66% of its issued share capital, which will allow Saba, its largest shareholder, an exit at close to net asset value.

Saba has agreed to the deal, as well as a three-year agreement to not exercise any voting rights on any resolutions proposed at any annual or other general meeting of the investment trust against the recommendation of the board.

Richard Stone, chief executive of the Association of Investment Companies (AIC), an industry body that represents UK investment trusts, said: “This is a successful outcome for shareholders.

“It’s excellent to see proposals that will allow Herald Investment Trust to continue to deliver strong returns for its shareholders. We’d like to congratulate the board of Herald and Aberdeen Investments on this creative solution.”

What does the Aberdeen deal with Herald Investment Trust mean for investors?

Investors have been on alert about Saba’s intentions towards discounted investment trusts and this move will end its interest in Herald, as well as other Aberdeen trusts.

As well as the three-year commitment to effectively not interfere with Herald, there is also a provision in the deal with Saba that would allow a further eight investment trusts in Aberdeen’s range to opt in to a similar arrangement if their boards decide to do so.

Under the proposed agreement, eight of Herald's staff, including lead manager Katie Potts, are expected to join Aberdeen.

The team will relocate to Aberdeen’s London office, and gain access to Aberdeen’s distribution and marketing capabilities.

The deal still has to go through regulatory approvals but a general meeting will be held towards the end of the month, and if approved, it is expected to complete in July.

Aberdeen will then become the investment manager.

This means investors won’t have to worry about uncertainty caused by a Saba takeover, which critics said may have created a more short-term focus.

Jason Windsor, chief executive of Aberdeen Group, said: “The Herald team has a long track record of backing early-stage technology companies, and driving material long term growth from those investments.

“As the fifth largest manager of closed-end funds globally, and as a leading small cap manager, we are delighted to welcome Katie Potts and her team to Aberdeen. Completion of this transaction will further grow our franchise and demonstrates our innovation and commitment to the sector.”

Potts said the investment trust’s focus will remain firmly on the technology and communications sectors, which she said continue to benefit from exceptional innovation and strong long-term growth prospects.

The AIC's Stone added: “Herald is a unique investment trust, backing high-growth tech and communications businesses, led by Potts, one of the longest serving managers in the industry. Long may it continue."

Investors are opting for more cash-like assets as they look to add diversification to their portfolios, latest fund flow data shows.

According to the Investment Association (IA), investors are showing resilience despite a more volatile geopolitical backdrop, but are more defensive in their choices.

It said long-term investment confidence remained steady – March net retail inflows were positive for the fifth consecutive month at £1.4 billion – but inflows were less than half of February’s £2.5 billion.

Which sectors are investors finding comfort in?

While investors are still putting money into the market, underlying allocations have shifted to a more defensive stance.

The IA Short Term Money Market sector was by far the strongest over the month, taking in a record £2 billion, suggesting renewed demand for capital protection and flexibility during the current uncertain environment.

A short-term money market fund is a relatively low-risk fund that invests in short-dated debt – government bonds or commercial paper, typically with maturities of 12-months or less. The idea is that they preserve capital while providing slightly higher returns than bank savings, with many of the liquidity characteristics of cash – in that you can park your cash securely without locking it away for a long time.

Miranda Seath, director, market insight and fund sectors at the IA, said: “Looking ahead, investors will continue to monitor geopolitical developments and their impact on the macroeconomic environment. While short-term volatility has led to more cautious positioning, this month’s data suggests that many investors are holding strong and remain committed to their long-term plans, reinforcing the importance of diversification and a disciplined approach to investing.”

Following the cautious theme, diversified strategies also saw high demand.

Mixed asset funds took in just over £1 billion. Targeted Absolute Return funds saw net retail inflows of £514.4 million while Mixed Investment 40-85% Shares gathered £154 million, suggesting continued demand for balanced strategies – investors want to remain in the market but are favouring a more diversified blend of assets while things look so uncertain.

Volatility Managed strategies posted £138 million inflows over the month.

Both equities and bonds saw broad sector outflows, of £1.3 billion and £97 million, respectively.

Equity funds suffered much stronger outflows in March, losing £1.3 billion, compared with £445 million in February.

At regional level, only Europe and Global sectors saw positive inflows, of £29 million and £135 million respectively.

North America saw its fortunes reverse – £417 million of positive inflows in February made way for £240 million of outflows in March.

Similarly, the UK also saw net withdrawals of £580 million, despite strong performance. Recent research by the trade body and Opinium said confidence in UK companies fell by 10 percentage points between the start of the Iran war (28 February) and April.

Investors are looking beyond US and UK

Also seeing withdrawals, though to a lesser extent, were funds invested in Asia and Japan, losing net outflows of £161 million and £86 million each.

As confidence in US and UK markets looks precarious, investors appear to be looking for diversification into other markets, with Global Emerging Market equities receiving a fourth consecutive month of positive demand in March, taking in £317 million as these economies benefit from a weakening US dollar.

The US dollar typically has a strong inverse correlation to emerging markets (EM). Many EMs borrow money in US dollars, so if the dollar is strong, they need more of their own (weaker) currency to service that debt – it costs them more.

There’s also the commodities angle. Many emerging markets are large commodity producers – think oil, gas, iron and coffee, which tend to be priced in dollars. If the dollar is strong, these products become more expensive to buy, which lowers global demand and hits EM exports.

Active funds struggled further in March

Perhaps also underlying investors’ reticence to make any strong bets in a particular direction, has been the dominance of trackers over active funds over the month.

The IA report showed net retail inflows into tracker funds of £915 million in March, bringing their total assets under management to £402 billion, representing 24.9% of total industry funds. This was marginally higher than February’s inflows of £890 million.

Conversely, active funds took in £448 million, dropping off considerably from the previous month, when they gathered £1.6 billion. Active equity outflows increased from £1.3 billion in February to £2.1 billion in March.

Which bond funds have investors favoured?

After four consecutive months of positive inflows, bond funds have now also taken a hit, with £966 million net redemptions. Only the IA Mixed Bond and Global Inflation Linked categories took inflows within fixed income. UK Gilts reported £108 million outflows while broader Government Bonds saw £124 million exit.

ISA season also provided a supportive backdrop, with £1.4 billion invested in March.

Seath added that it had been the most robust start to an ISA season since 2021.

She said: “This underlines the importance of tax-efficient investing as a consistent driver of flows, even during periods of heightened uncertainty.”

Selling (or “writing”) options on a portfolio to generate income has become more popular over the past two decades. The strategy took off in the zero-interest-rate era following the global financial crisis and got another boost when central banks took interest rates below zero again in the pandemic.

Investors collect a premium when they write call options on their existing shareholdings (known as “covered calls”). The logic is simple: you can earn ongoing income from a stock you already own if it doesn't pay a dividend and pick up an extra bonus even if it does. However, trading options is a complex business and can be costly if you don't know what you're doing. So there have been many attempts to create products that let individual investors use this strategy in a simpler way. These include premium-income ETFs – exchange-traded funds that hold a portfolio of stocks, write options on them and (typically) pay monthly distributions from the proceeds.

Premium-income ETFs have begun to hit the mainstream in the UK. The JPMorgan Global Equity Premium Income Active ETF (LSE: JEGP) and the JPMorgan Nasdaq Equity Premium Income Active ETF (LSE: JEQP) have over £1 billion and £2 billion in assets, respectively, while the Global X Nasdaq 100 Covered Call ETF (LSE: QYLP) has amassed around £0.5 billion.

There is also a fast-growing range of smaller products. In total, European investors have access to 57 such ETFs, according to ETF data provider ETFGI. Assets under management stood at $5.6 billion at the end of March after year-to-date inflows of nearly $1 billion.

A different approach with premium-income ETFs

Trailing yields on the most popular premium-income ETFs range from 7.7% for the JPMorgan US Equity Premium Income Active ETF (LSE: JEIP) to 11.5% for QYLP. This is much higher than the yield on a typical high-yield ETF and reflects a very different strategy.

“Option-income ETFs generate income through writing call options on stocks they hold as well as the dividend income, which is usually much lower than the options income,” notes Tom Bailey of HANetf, the ETF platform that issues the YieldMax and Rex covered-call ETFs. So while a dividend-income fund can only own stocks that meet certain yield criteria, a premium-income ETF selects stocks on their potential to earn high options premiums.

The need for liquid options markets pushes these premium-income ETFs into larger and more liquid equities, but usually different ones from a typical income fund. “Highyield ETFs often hold energy, utilities, consumer staples and other reliable dividend payers. Premium-income ETFs, by contrast, will often hold technology stocks,” says Bailey. This can provide investors with a degree of diversification in their income portfolios that they may otherwise have rejected due to a lack of dividend yield.

Premium-income ETFs aren't a replacement for income funds

Investors shouldn't view premium-income ETFs as a simple replacement for income funds. Dividend stocks tend to be less volatile than other equities, which translates into lower volatility for your portfolio value. Tech stocks are far more volatile, so while they may help the fund generate more income, that will come at the expense of bigger swings in the portfolio.

What's more, selling call options on the underlying asset means that premium-income ETFs cap equity upside (if a stock goes up a lot, the option buyer will exercise their right to buy the stock from you). So investors are trading off a few percentage points of long-term capital gains every year for immediate income returns.

Note, too, that income is not guaranteed. Options prices are volatile and depend on multiple factors: premiums and income generated will spike in periods of volatility and fall when markets are calm. For example, YieldMax Big Tech Option Income ETF (LSE: YMAP) is on a trailing yield of 27%, but that depends on high volatility in tech. Managers can sell more options to enhance the income, but that would increase leverage and risk. However, despite these drawbacks, there's clearly a growing market for these funds.

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Hedge funds that focus on picking stocks have had a fantastic start to the year. So-called long-short equity hedge funds returned around 6.7% for the year to 14 April, before the rally in equity markets that took place on news of the ceasefire in the Middle East, according to a report compiled by Goldman Sachs. The MSCI World index gained 4.3% for and the S&P 500 3.9%.

Long-short equity hedge funds try to beat the market by taking long positions in their favourite firms and going short or betting against the companies they believe are overvalued. This is just one part of the $5.2 trillion hedge-fund sector. Because they are aimed at high-net-worth and professional investors, hedge funds can invest wherever they want and in whatever they wish to, as long as they have their investors' permission. The Andurand Commodities Discretionary Enhanced fund, for example, an energy-focused hedge fund managed by legendary oil trader Pierre Andurand, returned 31% in the first quarter of 2026, driven by bullish bets on oil markets (although it went on to lose 51% in April). Another fund, Point72 Asset Management, is what is known as a “multi-strategy” hedge fund, and trades everything from oil to interest rates, currencies and equities to earn a return. It ended March up nearly 4% despite the volatility in global markets.

The global hedge-fund industry attracted $89.3 billion in new capital over the six months to the end of March, the highest two-quarter period of inflows since 2007. “Macro” funds have been particularly popular with investors, according to the latest HFR Global Hedge Fund Industry report. These funds seek to profit from movements in financial markets driven by political or economic events and invest across all asset classes, using leverage to boost returns. Major macro firms include Bridgewater Associates, Brevan Howard, Caxton Associates and Rokos. HFR's benchmark index for these funds, the HFRI Macro (Total), returned 4.9% in the first quarter, outperforming the MSCI World index by 8.5%. Meanwhile, HFRI's fixed-income index, the HFRI Relative Value (Total), added 1.4% in the quarter, around 2.6% better than the -1.2% return for the BofA Global Broad Market Corporate bond index and 3.3% more than a broad index of UK gilts.

Hedge funds are not as exotic as they look

These returns illustrate the key reason to hold hedge funds in a portfolio: they can help fund managers and investors to reduce volatility by gaining exposure to assets they may not have the expertise or resources to trade themselves. However, most hedge funds require a minimum investment of around £100,000. Some won't talk to you unless you're willing to put up millions. What's more, to make the most of these vehicles investors tend to hold a portfolio of funds, each with a different focus. So, adequately to take advantage of the sector, investors need several million pounds. That's why the hedge funds tend to be off-limits to all but the wealthiest individual investors.

That said, UK investors do have some options. There are a number of hedge fund structured as investment trusts, as well as one publicly listed hedge fund based in London and traded on the London Stock Exchange.

In our globally interconnected financial markets, there are also options on other exchanges around the world that could be worth considering for those seeking to diversify their portfolios.

Hedge funds are often portrayed as exotic and complex, but in reality, they are very similar to the funds available to the average retail investor. A hedge fund is simply a fund formed by a group of private investors with the aim of generating a return on their investment over a set period. They often seek to achieve a positive absolute return, rather than outperform a benchmark – that is, they seek to achieve a positive return regardless of whether the broader market is rising or falling.

However, because hedge funds tend to focus on high-net-worth investors and institutions (such as pension funds), the regulations governing them are much more flexible. It's assumed that the institutions and wealthy individuals who decide to invest in hedge funds have the skills to evaluate the proposition themselves, so hedge-fund managers have much more flexibility around where they can invest and how they can invest.

There's also no obligation for hedge-fund managers to report what they hold and why they hold it. Some managers may decide to own just a handful of different assets and update investors once a year. Others may hold thousands of different investments, with teams of traders buying and selling positions every minute. Hedge funds also tend to have higher fees than the active funds available to the mass market. It's common for managers to adopt a “two and 20” structure, with a management fee of 2% a year and a performance fee of 20% of any profit, although managers will offer better terms for more important customers. While the additional fees do undoubtedly have an impact on returns over time, it ensures the managers, who often own a big stake in the fund themselves, have a strong incentive to achieve the best returns, and this level of incentive structure is something you don't usually see with active funds aimed at the mass market.

Hedge funds also frequently restrict their investors from withdrawing money. This can be helpful when using esoteric or illiquid investment strategies and managers don't want to have to deal with a large number of redemption requests in any particular period, which may force them to sell assets at a bad time. In this respect, hedge funds have a lot in common with investment trusts. Investment trusts have a fixed capital base; hedge funds can lock in their capital for a period. Some funds will require investors to commit for five years when they make an initial investment. Others may require them to submit redemption requests quarterly rather than daily. They also often reserve the right to “gate” withdrawals, or prevent investors from accessing their cash if the manager believes doing so would have a detrimental impact on investment returns.

Just like investment trusts, hedge funds can and do use leverage, or borrowed money, to enhance returns. However, this has led to disastrous outcomes in the past, when managers have borrowed too much, too quickly. One of the most notable recent examples was Bill Hwang's Archegos Capital, which imploded after borrowing $160 billion against just $20 billion in capital. The funds collapse wiped out Hwang's $20bn net worth overnight and ultimately led to the collapse of global investment bank Credit Suisse. In another example, in the first quarter of 2021, Melvin Capital, run by Gabe Plotkin, lost about $4.5 billion, or 49% of its assets, in a few weeks, betting against GameStop using borrowed funds. The fund survived only after receiving a $2.5 billion bailout, although it closed for good a year later.

Hedge fund managers are only human

Hedge funds have attracted plenty of criticism over the years, mainly on the issue of fees. A study published in February 2020, “A Bias-Free Assessment Of The Hedge Fund Industry”, found that between 2013 and 2019 hedge-fund managers created up to $600 billion in value added, before fees. Net of fees, the figure was significantly lower. In fact, one study of 22 years' worth of hedge fund data, also published in 2020 (“The Performance Of Hedge Fund Performance Fees”), found that fees consumed 64% of the gross returns on investors' capital over the long run.

Hedge-fund managers would, of course, argue that they deserve higher fees because they outperform the market. And that is true to a certain extent. But they are also only human. Another study published in May 2011, “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, found that although a hedge-fund portfolio's buy-and-hold return between 1980 and 2008 came in at 12.6%, higher than the S&P 500's total return of 10.9% over the same period, the dollar-weighted annual return, accounting for investors' inflows and outflows, was just 6% a year. This shows that, although most hedge-fund investors are far richer than the average investor, they're still subject to psychological biases. Indeed, Morningstar's latest Mind the Gap report revealed that the average investor lost 1.2 percentage points annually over the past decade due to poor timing of purchases and sales. Multiple studies have reached the same conclusion.

Focusing on this performance in isolation misses the point, however. Hedge funds and alternative strategies should only be used as part of a portfolio to provide diversification and help smooth long-term returns. Hedge fund Universa Investments is one of the best examples of what a hedge fund or alternative strategy can provide. Universa specialises in risk mitigation against “black swan” events – that is, unpredictable and high-impact drivers of market volatility. To this end, it employs a bespoke combination of credit-default swaps (a form of credit insurance on corporate debt), stock options and other derivatives to bet on market movements. The fund is highly secretive, but Universa reportedly manages $20 billion and posted a 100% return on capital when Donald Trump unveiled his sweeping tariffs last April. It reportedly earned 4,000% in March 2020 when the pandemic broke out.

Universa is far from the only fund that has used this approach to make enormous profits. Bill Ackman's Pershing Square hedge fund earned $2.6 billion during the pandemic after paying $26 million to acquire a portfolio of credit-default swaps, which then soared in value by more than 10,000%. These trades don't come around very often, which is why it can pay to have a manager focused on finding opportunities.

Wealthy individuals and companies that invest in hedge funds will do so as part of a broadly diversified portfolio. This helps reduce the risk of volatility, erosion of returns by fees and any individual hedge-fund blow-up. Insurers typically allocate between 3% and 10% of their funds to hedge funds and other alternative assets, while public pension funds allocate up to 12% on average, according to figures compiled by Goldman Sachs and the French bank BNP Paribas. University endowments can take larger positions, primarily because they have a much longer-term focus.

Endowments allocate 15%-40% of their assets on average to long-short, event-driven and emerging-market hedge funds. Family offices, which can also take a longer-term view, also tend to have a higher allocation, although typically capped at around 25% on average, according to research.

One of the world's most active hedge-fund investors is the Canada Pension Plan Investment Board (CPPIB). This $714 billion fund has been investing in and backing new hedge-fund managers for years and it's accumulated a $76 billion portfolio of internally and externally managed funds. According to the fund's 2025 annual report, its strategies have delivered $15.6 billion above its benchmark in net added value over the past five years, mainly due to external fund allocations.

Hedge funds for the average investor to buy

While most hedge funds are off-limits to the average investor, the UK is actually uniquely positioned in having a number of publicly traded hedge funds available for individuals to buy and sell on the London Stock Exchange. Two of these are in the FTSE 100: Pershing Square Holdings (LSE: PSH), and the world's largest publicly traded hedge fund, Man Group (LSE: EMG).

Pershing Square was listed in London in 2017 and is run by Pershing Square Capital Management, founded in 2004 by Bill Ackman. It's not an exact copy of the parent firm's fund, but rather a selection of the best ideas. The fund aims to hold eight to 12 core holdings (although a total of 15 holdings are currently listed), bundled up within an investment-trust structure. That means it's available to smaller investors and has the added benefit of an independent board of directors that provides oversight and ensures their representation. The trust has a typical hedge-fund fee structure, with an annual management fee of 1.5% and a performance fee of 16%. Management would argue that the returns have more than justified the high fees. Since its inception in 2012, the fund has produced an annualised return in terms of net asset value of 11.8% compared with 6.5% for the FTSE 100 in US dollar terms. Holdings currently include Uber, Amazon, Google and Meta.

Man Group runs a range of investment products operating under a variety of investment strategies. Its main options come under its computer-driven trading arm AHL, and they've performed particularly well this year. In the three months to the end of March, its AHL Alpha fund added 5.7% and AHL Dimension returned 5.6%. Man Strategies 1783 notched up a 3.8% return. Thanks to this positive performance in a quarter defined by volatility, assets reached $228.7 billion in the three months through March, up from $227.6 billion at the end of 2025. Buying shares in Man Group won't give investors direct access to its underlying strategies, but will provide exposure to the firm's income stream. For the year to 24 April, shares in the hedge fund returned 11.6% and over the past five years produced a total annualised return of 13.8%.

Another London-based option for investors is BH Macro (LSE: BHMG). This investment trust has just one investment: units of the Brevan Howard Master Fund, one of the world's largest and most successful macro hedge funds. This trust is designed to provide investors with a strategy to diversify away from equity markets. Since the first half of 2007, there have been 20 significant market drawdowns where the US S&P 500 index has fallen by 5% or more. In 17 of these 20 periods, BH Macro's net asset value actually increased. In October 2008, for example, when the S&P 500 fell by more than 15%, the fund's net asset value rose by several percentage points. The fund, with its 150 portfolio managers and traders, has achieved an annualised return of 8.5% since inception, with less volatility than in broader equity markets.

Another option is Tetragon Financial (LSE: TFGS). This trust owns a portfolio of private businesses, hedge funds, credit, real estate and bank loans. Its net asset value has risen 612% since its inception in early 2007, nearly double the MSCI All Country World index. It charges a performance fee of 25% and an annual management fee of 1.5%.

Blackstone (NYSE: BX) is one of the world's largest publicly traded asset managers. It was founded in 1985 and started life as a private equity and mergers and acquisitions shop and has since expanded into real estate, private credit, fund management and even hedge funds. The $1 trillion asset manager is leading the charge in bringing hedge funds to high-net-worth individuals with the Blackstone Multi-Strategy Hedge Fund, known as BXHF, which plans to start trading this year. According to Bloomberg, the fund will invest about 30% of its assets in other hedge funds as well as make its own investments. It will charge a 1.25% management fee and take a cut of 12.5% of profits once it earns at least a 5% return. Blackstone could be one of the best ways to invest in the booming market for alternative assets, offering diversification across multiple sectors.

There are limited options for investing directly in hedge funds and hedge-fund managers, but investors can use a selection of investment trusts to build exposure to alternative assets and diversify their portfolio themselves. For example, BioPharma Credit (LSE: BPCR), an offshoot of Pharmakon Advisors, one of the world's largest specialist biotechnology funds, lends directly to biotechnology companies and yields 7.5%. The trust has a near-spotless lending record.

Elsewhere, the TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) focus on trading collateralised loan obligations and mortgage-backed securities to generate a high single-digit annual dividend for investors. These funds are highly specialised vehicles, but can help diversify portfolios.

On the credit side, there's also CVC Income and Growth (LSE: CVCG). This investment trust is managed by the private-equity giant CVC and holds a portfolio of senior secured loans acquired for yield and value. Once again, the trust could provide investors with diversification during turbulent times.

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“It's a market of stocks, not a stock market” is an old cliché, intended to remind us why investing is ultimately about how well individual companies are doing from the bottom up and not a top-down view of the FTSE 100 or S&P 500.

I don't entirely agree with this thinking, at least in the modern world. The growth of index investing has meant that many people now invest in the whole market or in broad sectors and don't care about the companies they hold. Money flowing in and out of funds can do more to determine whether valuations rise or fall than real changes in a business's fundamentals.

Still, it is always important not to let big-picture fears blind us to how well individual stocks are doing. If most companies are seeing robust earnings growth from the bottom up, it is likely that the overall index will keep going up. And right now, the reality is that earnings growth remains very strong in the US.

The year-over-year blended growth rate (ie, including both results reported so far and latest estimates) for the S&P 500 is currently 15.1%, according to FactSet – the sixth successive double-digit quarter. The index is expensive: at just over 7,100, it's on a trailing price/earnings ratio of 28. Yet if earnings keep compounding like that, it's not really a stretch to stay bullish.

The greatest threat to earnings growth

In the medium term (maybe three to five years), one has to wonder whether giant companies can continue to earn such high margins: the S&P 500 net margin is once again setting a new record of 13.4%. The geopolitical and political trends that let businesses – especially multinationals – become ever more profitable over several decades are shifting. Maybe this goes into reverse. But a few years is a lifetime in the markets and we are obviously not there yet.

In the shorter term (maybe a year or two), the extent to which AI mania is underpinning this boom cannot be ignored. In the tech sector, earnings growth is at 46%. There is a very fine line to be walked here: if all this investment does not bring huge productivity gains, it will grind to a halt. If it puts too many people out of stable employment, the political backlash could be equally dangerous. Yet all investors care about is what will happen in the next couple of quarters, and there is no sign of the boom letting up so far.

So what is the greatest ultra-short-term threat? Energy. The amount of oil at sea when the Middle East crisis started means that the consequences of the closure of the Strait of Hormuz and the shutting in of millions of barrels a day of crude is not really translating into shortages yet. Even if supplies resume tomorrow, there will be a lag and the effects will still show up over the next couple of months. But if they do not resume soon, the crunch is going to become very evident. A market focused on historic earnings and understandably upbeat forecasts is not pricing that in.

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Activist investor hedge fund Saba Capital Management has landed its first victory in its ongoing attempts to displace the boards of several investment trusts.

Saba secured control of Edinburgh Worldwide (LON:EWI) (EWIT) during a shareholder vote today.

It comes as Saba has been building a sizeable stake in numerous UK investment trusts since late 2024 in an attempt to restore closed-ended funds with large discounts to net asset value that it believes are underperforming.

The investment trust industry had until now largely batted off the challenges from Saba, amid concerns about its investment strategy.

But after a couple of failed attempts by Saba since last year to displace the EWIT board, it managed to build up enough influence to call and win a vote at the annual general meeting today (30 April).

EWIT said in a stock market update that there were “insufficient votes” in favour of re-electing five independent directors – blamed on fewer private wealth and retail shareholders – while three Saba nominees were approved.

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “Thousands of shareholders will be disappointed by this announcement, having twice rejected directors nominated by Saba only to see them appointed to the board at the third attempt.”

What the Saba vote means for investors

This is not Saba’s first attempt to take control of a UK investment trust, after losing votes with funds such as the Baillie Gifford US Growth Trust and the Herald Investment Trust.

But its persistence has paid off with EWIT after a couple of failed takeover attempts. Saba will now have control of its first UK investment trust in what Jonathan Simpson-Dent, chair of Edinburgh Worldwide, described as a "disappointing day".

He warned that long-standing shareholders are set to lose exposure to “this exciting mandate focused on next-generation technology, seemingly in favour of Saba's plan to invest in other UK investment trusts.”

Simpson-Dent added: “Retail and private wealth shareholders have been ground down by Saba's repeated attacks. A significant number have already chosen to exit the company, replaced by institutions seeking to capture the upside potential in EWIT's substantial SpaceX exposure.

"I expect many more retail and private wealth shareholders to follow. This should represent a wake-up call for the investment trust sector and its regulators.”

Danni Hewson, AJ Bell head of financial analysis, said Saba has been “like a dog with a bone” on EWIT.

She said: “While it may have successfully fought off Saba’s previous efforts – both last year and at the beginning of this year – the trust has suffered an ebbing away of long-term shareholders over time and this has made the activist’s task of assuming control somewhat easier.

“The timing of Saba’s victory is lent extra sensitivity by the looming market lift-off for Edinburgh Worldwide’s biggest holding – Elon Musk rocket and satellite firm SpaceX. Saba’s plan, once the blockbuster IPO happens, seems to be to liquidate this stake and turn the trust into a vehicle for investing in other undervalued UK investment trusts.”

Hewson suggests that Saba’s win will create consternation in the boardrooms of other investment trusts. AJ Bell research published in January 2026 showed Saba has holdings in more than 40 UK-listed trusts.

She added: “The trust universe has been vulnerable thanks to persistent discounts to the value of underlying assets, uneven performance and a growing preference for passive over active funds.”

With this in mind, investors may welcome Saba taking control and trying to turn things around.

However, hedge funds often approach investments with shorter time horizons in mind and it may be focused more on making money quickly.

This may not be a bad strategy if it works but it might not align with your own investment plan, risk tolerance, or your reasons for buying the trust in the first place.

Hewson added: “Saba’s efforts, which largely began in 2025, were effective as a wake-up call for the industry.

“However, now it has won control of a trust, warnings about its short-termist and self-serving approach and the impact on the interests of individual investors will be put to the test.”

Listed infrastructure funds look increasingly attractive. Their shares have been knocked back by higher gilt yields, which have risen due to fears of a short-term energy-price shock. However, the medium-term disinflationary story is intact owing to a weaker job market, while prospective yields of 4%-7% for the infrastructure funds are much more appealing than gilts themselves, which face the risk of a fiscal crisis.

In contrast to the renewable-energy trusts – which are struggling to sell assets to pay down debt or finance dividends – the infrastructure funds continue to perform well operationally. They have moved away from public-private partnership (PPP) projects into moderately higher-risk, but also higher-return investments. Dividends are both sustainable and increasing, asset sales are enabling both share buybacks and new investment, and net asset values (NAVs) are rising.

Discounted infrastructure funds to buy now

3i Infrastructure (LSE: 3IN) suffered a rare setback last year when it wrote down its investment in German internet provider DNS:NET to zero, knocking £200 million off its net asset value. DNS:NET's business plan relied on new equity and debt to fund its roll-out plan and 3IN was clearly not prepared to step in if others weren't willing to invest more. However, the subsequent sale of TCR, the largest independent lessor of airport ground equipment, at a 22% premium to its last valuation, revived sentiment.

TCR had been 3IN's largest investment, accounting for 26% of NAV. The proceeds have been used to repay debt, make a new investment (Lefdal Mine Datacentre in Norway) and still leave £200 million of net cash for investment or share buybacks. The shares are now trading on an 11% discount to NAV and a dividend yield of 3.7%.

Sentiment towards HICL Infrastructure (LSE: HICL) has not recovered from a misguided attempt to merge with the Renewables Infrastructure Group, another trust run by the same manager. The shares still trade on a 19% discount to NAV and yield 6.5%.

HICL has recently sold its stake in the A63 motorway in France for £311 million, at a 21% premium to book value. Some analysts have complained about its decision to reinvest £52 million to increase its stake in Cross London Trains, which owns the rolling stock for the Thameslink network, rather than using it all to buy back shares. However, this looks like a low-risk investment in a familiar asset at a knock-down price, while available cash still leaves plenty of scope for buybacks.

International Public Partnerships (LSE: INPP) reported solid results, yet the shares still trade on a 12% discount and yield 6.4%. Investors may be rattled by its £254 million commitment to invest in the Sizewell C nuclear-power station, but INPP has a good record in large projects such as the Tideway super sewer under the River Thames, Cadent gas distribution and North Sea energy-transmission assets.

Pantheon Infrastructure (LSE: PINT) appears more expensive than its peers, on a discount of 9% and yielding 3.7%. Still, its 2025 investment return of over 14% was the strongest. The trust sold its stake in US power business Calpine (its first disposal since listing in 2021) and made a new investment in Intersect that was very quickly followed by the sale of some of Intersect's assets to Alphabet. The maturing portfolio fully covered the dividend for the first time.

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Many investment trusts have become very rattled by the threat of activist investors and are concerned about reducing their discount to net asset value (NAV). This is mostly good: some boards had become too dozy about putting the interests of their investors first and more attention to structural discounts was overdue.

Still, it is also clear that many investment trust boards are convincing themselves that regular share buybacks and tender offers (an offer to buy shareholders' shares) are the best way to keep discounts down. As a shareholder in a number of investment trusts, I am far from convinced that this always produces the best outcome for investors like me.

The rules for investment trusts with wide discounts

Wide discounts can reflect a range of factors, including poor performance, doubts about the reported NAV, being in a sector that's out of favour, or the investment trust being too small and/or illiquid. Tenders and buybacks can do nothing for the first three: if the problem persists, you may need to change manager, change strategy, find ways to prove the NAV, or just wait for your market to become popular again.

Meanwhile, the fourth scenario is why too many buybacks and tenders can even be actively harmful. They shrink the size of the fund, which will make it less attractive to many investors. Even an investment trust that starts at a healthy size can shrink itself into irrelevance if it gets hooked on buybacks and tenders in a vain attempt to control a discount driven by other factors. Consider Bellevue Healthcare (now CT Healthcare), which peaked at around £1 billion in 2021, but had dwindled to under £300 million by 2025, without really reducing the discount.

Who benefits the most from buybacks and tenders?

The other question is who benefits most from buybacks and tenders. Buybacks are at least accretive to remaining shareholders if the price is genuinely below net asset value. Still, I am cautious about trusts that decide to sell illiquid assets in weak markets to fund buybacks, because they may be selling the best assets and leaving the fund with the junk that is less likely to be worth its carrying value.

Since tenders typically happen near NAV, they are not directly accretive. True, long-term investors could take up each tender offer to the limit allowed, take the proceeds, and use them to buy shares more cheaply in the open market again – but many won't. So the beneficiaries here are often influential shareholders – activists or institutions – who want a chance to exit at a preferential price. If the discount does not then shrink and the trust becomes smaller and less viable, long-term holders have been left worse off by the whole process.

This does not mean that tenders and buybacks are always bad – but they need to be structured in a way that limits these disadvantages. A large exit opportunity every five years, perhaps triggered only if the fund underperforms, is fairer to all investors – not just those who want to cash out – than constantly shrinking the assets.

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Investment trusts are the ideal vehicle to build long-term wealth. A real-world example recently posted on LinkedIn by investment manager John Moore makes this point well.

The portfolio was set up in 1999 and initially held Gartmore Shared Junior Zero Div (7.3% by value), English & Scottish Investors (18.4%), Finsbury Trust (18.2%), Law Debenture (19.8%), Majedie Investments (17.7%) and Scottish Mortgage (18.5%). You will notice that some of these no longer exist, while others have changed significantly.

English & Scottish Investors has undergone several reinventions. It became Gartmore Global Trust in 2002 and Henderson Global Trust in 2011. It was merged into Henderson International Income Trust in 2016 and this was then merged with JPMorgan Global Growth & Income (LSE: JGGI) in 2025.

Tracing investment trust returns back over multiple decades and mergers is challenging. However, I estimate (using Google's Gemini AI tool) that an investment of £1 in 1999 would now be worth £7.42 in JGGI shares today – an annual return of 7.8%. The fate of the Gartmore Shared Junior Zero Dividend trust, created in 1993, was less happy. This was a split-capital trust that emerged from Gartmore Value in 1993.

During the late 1990s, split-capital investment trusts with complicated structures became fashionable. Many ended up holding the shares of other splits. This financial engineering was a disaster – when the tech bubble burst, the sector imploded under a mass of debt and cross-shareholdings. By 2003, most split structures had either collapsed or been wound up. The Financial Services Authority, the then-regulator, stepped in and set up a £194 million compensation fund in 2004.

The rest of the portfolio still exists, with some manager and strategy changes. Finsbury Trust is now Finsbury Growth & Income (LSE: FGT) and has been run by Nick Train since Lindsell Train, the company he co-founded, was appointed portfolio manager in 2000. The shares have returned 677% since then, despite recent lacklustre performance.

Why you should consider investment trusts

Majedie Investments (LSE: MAJE) traces its roots back to 1910 as Majedie (Johore) Rubber Estates, a plantation company in Malaysia and is still controlled by the founding Barlow family. In 2002, the trust backed the launch of Majedie Asset Management, which ran its investments until it was acquired by Liontrust in 2022. Today, it is a multi-manager investment trust overseen by Marylebone Partners (now part of Brown Advisory). Gemini estimates that an investment would have returned 4.1% per year between 1999 and 2026.

Scottish Mortgage (LSE: SMT) and Law Debenture (LSE: LWDB) will be very familiar to many MoneyWeek readers. Like Majedie, Scottish Mortgage began by funding rubber plantations in Southeast Asia in 1909, but quickly began investing more widely. Today, it holds a high-conviction global portfolio of public and private growth stocks. I calculate it has returned 16.7% since 1999. Law Debenture is a unique combination of a UK equity portfolio and a professional services business. I estimate its annual return has been 11.8%.

So this portfolio has probably returned 11%-12% per year since 1999, compared to 8.2% for the MSCI AC World index, assuming no rebalancing and dividend reinvestment. The performance of the biggest winners more than offsets the losers. Investment trusts can use their fixed capital to invest and survive market cycles that can be terminal for open-ended funds.

This is why the MoneyWeek portfolio, set up in 2012, is based on investment trusts. There have been a few changes over the years, but the goal has remained the same: a global, set-and-forget portfolio. It now holds JGGI, LWDB and SMT (and has held FGT): other positions are AVI Global (LSE: AVI), Caledonia (LSE: CLDN) and Personal Assets (LSE: PNL).

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Another week brings another wild ride in the Middle East. Markets are still taking the swings far more calmly than almost anybody would have expected a few weeks ago. There's more volatility below the headlines when you look at which sectors are doing well or poorly, but the fact that global stocks are broadly unchanged since America and Israel first attacked Iran seems increasingly hard to understand.

One possibility is that investors remain optimistic that the crisis will pass and everything will go back to the way it was before. That is plausible, but becomes less likely the longer the disruption goes on. The second is that many people suspect that this is an inflexion point, geopolitically and economically, but feel that the long-term implications are still unclear. If so, it may be more sensible to do little and wait and see, rather than overreact wildly.

Brazil could prove to be a winner

So who, potentially, are the winners? The crisis will increase the focus on energy security, which should support commodity prices (short-term) and resource investment (medium-term). At a top-down level, maybe this will be good for Brazil. Yes, this is an economy with a long history of unfulfilled promises, but it is one that has done very well in previous resource booms.

Brazil's market is up strongly over the past year, but has not moved much in this crisis. On a forward price/earnings ratio of ten, it is not as cheap as it sounds (a cyclical economy should trade on low valuations), but it is not expensive. Brazil's economy is not immune to higher energy costs – diesel and fertiliser prices are rising – but very high use of biofuels should help insulate it to some extent. I am considering buying the Xtrackers MSCI Brazil ETF (LSE: XMBR).

What about the losers?

The crisis may accelerate the decline of the US dollar as the global reserve currency. The assumption is that this will be a gradual process given how embedded the dollar is in the global financial system – but we should remember that ruin often happens “gradually, then suddenly” in the words of one of Ernest Hemingway's characters.

Fewer foreign buyers for US Treasuries does not mean that America must go bankrupt – I do not think there is any likely way that America will default, other than stupid political theatrics around the nonsensical debt ceiling. However, the choices that it might one day have to make to avoid bankruptcy probably point either to much slower growth or higher inflation.

More broadly, it is hard to guess at this point what the implications are if the US dollar loses its unique status. A global financial system that no longer uses the dollar – and by extension many American companies – as the lynchpin of so many transactions could look very different. To take just one speculation, I hold Mastercard and Visa in my portfolio – I wonder how vulnerable they could be to potential efforts to decouple the world from America.

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Edinburgh Worldwide’s tender offer proposal to shareholders has been defeated thanks largely to opposition from activist investor Saba Capital Management (Saba).

The vote took place at Edinburgh Worldwide’s (LON:EWI) (EWIT) General Meeting on 10 April.

The proposal would have offered shareholders in the investment trust a chance to tender their shares at close to current net asset value (NAV) while retaining exposure to any future upside in the event of an IPO for the trust’s top holding, Elon Musk’s SpaceX.

Of the total votes cast, 46.2% of shares were voted in support of the tender offer resolution and 53.8% against.

Saba Capital and two other institutional shareholders accounted for the vast majority of the votes against the proposal, which constituted 36.8% of the total issued shares in the trust. Saba owns approximately 30% of EWIT’s shares.

EWIT’s board indicated that it will now pursue the tender offers that Saba has previously suggested it will recommend, which would give shareholders two windows to tender their shares at close to NAV: the first being soon after the upcoming Annual General Meeting (AGM) and the second following a potential SpaceX IPO or liquidity event.

“The vast majority of non-Saba shareholders wanted the tender offer proposed by the board,” said Richard Stone, chief executive of the Association of Investment Companies, an industry body representing UK-listed investment trusts. “They have also indicated – twice – that they do not want to be trapped in a Saba-controlled vehicle.”

Why is Edinburgh Worldwide proposing share tender offers?

EWIT’s tender offer had been proposed as an exit ramp for investors that didn’t want to become trapped in a Saba-controlled investment trust – something that the board had seemingly accepted as an inevitable eventuality.

“Faced with this reality, the Board's priority is to ensure shareholders can still exercise their right to a meaningful choice,” said Jonathan Simpson-Dent, chair of Edinburgh Worldwide.

Saba’s latest proposal to displace EWIT’s board will be voted on at the trust’s AGM, which is scheduled for 30 April.

Should voting patterns follow those at the latest requisitioned general meeting then the AGM could see Saba’s nominated appointees take over the trust.

See also: Saba launches investment trust ETF.

Saba won’t support Edinburgh Worldwide tender offers

On 30 March, Saba indicated that it would recommend that the board of directors it has nominated – should they be voted in at the upcoming AGM – give EWIT shareholders three options:

• Option 1: Tender immediately and exit at NAV less costs.
• Option 2: Tender following a potential SpaceX IPO or liquidity event – but prior to any potential change in investment mandate – at NAV less costs.
• Option 3: Retain their investment in EWIT.

On 13 April, however, Saba said in a statement that it retains confidence this proposal is the best outcome for shareholders, but also that it will not support any further proposals from EWIT’s board ahead of the AGM. EWIT had said that it would advance the further tender offer as soon as 20 April if Saba supported it.

Saba’s statement said “it would be irresponsible for the board to waste shareholders’ time and money pursuing another tender offer before the AGM” and criticised Baillie Gifford’s management of the trust, particularly a recent selloff of SpaceX shares at well below the $1.75 trillion valuation it is reportedly seeking at an upcoming IPO.

Saba estimates this selloff could cost EWIT shareholders £86 million, or 10.8% of current NAV.

EWIT’s board claims it is contradictory for Saba to withdraw support for the offer whilst still claiming to favour it.

“It is extraordinary that Saba has now chosen to block its own proposal which it claims it is still endorsing,” said Simpson-Dent.

EWIT’s board has previously pointed out that the directors Saba has nominated are ostensibly independent, and that there is therefore no guarantee that they would execute the proposal Saba has recommended if voted in at the AGM.

Derwent London (LSE: DLN) is the largest office-focused London property real estate investment trust (REIT) with 61 principal properties distributed across what the company calls 13 central London “villages”. These include 88-94 Tottenham Court Road in Fitzrovia and 50 Oxford Street, which comprises 6,100 square feet of office and retail space. The group also owns an extensive property pipeline, including 50 Baker Street W1, which consolidates three properties acquired over the past few years into a single office and retail building, scheduled for completion in the second half of 2029.

Put together, Derwent's existing portfolio and its pipeline are worth around 3,322p per share based on EPRA net tangible assets, an industry-standard performance measure. But the stock is trading at just 1,600p. According to analysts at Berenberg, this discount is deeper than the valuation trough in January/ February 2009. A yield of about 5.1% is also the highest ever recorded, based on records going back to 1984.

Commercial London property is highly sought after

Derwent's valuation is, in a word, surprising. Best-in-class London office property is highly sought after and the market is incredibly tight. This is clear from the company's recent leasing activity. In 2025, Derwent signed £11.3 million of new leases at 9.9% above previously estimated rental values. It also pushed through rises of 6.4% across the rest of its portfolio. In 2026, management predicted rental growth of 4%-7%.

The company's growth is better than the market average. According to Savills, rents for prime office space in the West End rose on average 6.1% to £166.61 per square foot last year, helped by financial firms moving from the City, where there's a structural undersupply of office space. At the prime towers, the vacancy rate is as low as 0.9% and just 0.2%, excluding those under offer. The fight for space is pushing up rents, which by West End standards were once low in the Square Mile. At 8 Bishopsgate EC2, law firm Proskauer Rose expanded onto the 46th floor on a 13-year lease, paying £145 per sq ft compared with the average of £74.34 for premium rents (Grade A) in the Square Mile (and closer to £40 for Grade B).

These figures illustrate the diversity of the central London property market. Derwent's portfolio sits somewhere in the middle. Its West End assets have an average rental value per sq ft of £72.77, including projects in the pipeline. Some of these major projects, after renovation, could command rents near £110 per sq ft. Over the next five years, management has estimated that leases expiring and rental reviews will drive up rents in the existing portfolio by about 30% per sq ft.

There are really three main reasons why REITs can trade at a deep discount to net asset value (NAV). The first is debt; too much at high rates is terminal. The second is demand or lack of it. If no one wants to rent the properties, they become a liability for the business rather than an asset. And the third is future liabilities.

One particular challenge the UK market is facing right now is the demand for high-end prime properties that are energy-efficient and have all the amenities staff have come to expect in their offices. The cost of bringing assets up to specification, especially in places such as central London, which has some of the highest planning fees and construction costs in the world, can often outweigh the potential benefit.

Derwent's unjustified discount

Derwent is addressing the upgrading issue by offloading smaller, older assets. It has agreed £144 million of asset sales so far in 2026, with a further £130 million under offer. This is freeing up cash for the group to reinvest in flagship prime developments, such as its 50 Baker Street development.

When completed, the new valuation is expected to show a 25%-plus profit on cost. In 2025, Derwent spent £182 million on regeneration and £142 million is planned this year. Major upgrades are expected to generate a 6.5% yield.

Asset recycling is helping Derwent keep debt under control. Its loan-to-value ratio stands at around 30% – management's target – with maturities fixed until 2034. It recently redeemed a £175 million March 2026 secured bond at 6.5% with “existing liquidity resources” (likely to comprise cash and revolving credit facilities). The next maturity is a £350 million 1.9% bond due in November 2031. Total interest on the company's £1.5 billion debt was covered 3.1 times by income last year.

So there don't seem to be any of the major issues that would usually justify a lower Reit valuation hanging over the company. The dividend is also covered 1.2 times by earnings per share, a figure that's expected to rise to 1.5 times by 2023. As new and upgraded assets start contributing to Derwent's bottom line, earnings per share are expected to rise by 25% to 30% by 2030. EPRA net tangible assets is also expected to rise to 4,119p per share, according to Berenberg.

The one unknown is how the London property market will evolve over the next few years. The outlook for the UK economy is uncertain, to say the least. Unemployment in London has surged to 7.9% for the November-January 2026 period, the highest in the UK and above its pandemic peak. However, Derwent's shares already have a substantial margin of safety baked into the current valuation. What's more, it's clear that while demand for office and retail space across central London faces an uncertain future, Derwent's portfolio of high-end spaces remains in demand. The uncertainty is even working in the firm's favour as other parties push back or delay new projects.

Today, Derwent's shares present a rare opportunity for investors to buy a portfolio of London property for around 50p in the £1 with a 5.1% yield and lots of growth ahead.

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The MoneyWeek ETF portfolio – which we have been running in one form or another since 2013 – is designed to be a very simple way to invest. It doesn't try to time the market, forecast the economy or pick specific stocks. It simply holds a diversified set of exchange-traded funds (ETFs) that complement each other, tilted towards the areas that we think offer the best value.

In any given year, some holdings are likely to do much better than others. Over time, the portfolio will drift away from its target weights. So once a year, we rebalance the holdings back to their target. For simplicity we usually do this at the start of a new tax year: this means that an investor could use the new tax year's contributions to an individual savings account (ISA) or pension to carry out the rebalancing.

The past year has been an eventful one, yet the MoneyWeek ETF portfolio is up by 25% – a much higher return than we would expect. That reflects strong performance from several positions. Gold is up 50% in sterling terms, even after slipping from its highs. More recently, the energy sector has done very well, up 58%. Emerging markets (up 42%) and Japan (up 38%) have been boosted by investors diversifying away from the US – although this has reversed a bit since the beginning of March. At the other end of the scale, bonds have been weak, although we have focused on short-dated bonds and so our holdings are more or less flat over the year.

The MoneyWeek ETF portfolio reset

As a result, many of the MoneyWeek ETF portfolio weights will be quite far from target this time. The exact position will be different for every investor, but gold and emerging markets are both around two percentage points overweight in our tracked portfolio and most of the other holdings are around one percentage point underweight.

To minimise costs, our rule is not to rebalance any position that is only a small distance away from its target. Fiddling with small overweights and underweights incurs trading costs for no benefit. However, since this year will require quite a lot of trades in the tracked portfolio, we are going to reset all positions to target weights.

We are also going to make one change. We have been holding iShares $ Treasury Bond 3-7 Years GBP Hedged (LSE: CBUG), on the basis that we were most likely to see short-term interest-rate cuts, but volatility in longer-term bonds. However, the prospect for large cuts seems to be receding. Meanwhile, the risks of higher inflation are rising – it could easily top 3% again over the next year. In this scenario, the 4% nominal yield from CBUG looks less compelling than the 0.9% real yield from iShares $ TIPS 0-5 GBP Hedged (LSE: TI5G). We could increase our exposure to inflation-linked bonds, but there is also a case for adding more growth to the MoneyWeek ETF portfolio. So we will temporarily hold this as uninvested cash while waiting to see if the Middle East ceasefire holds.

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Most listed private-equity funds are trading at deep discounts to net asset value (NAV). These discounts imply scepticism from investors about whether the funds will be able to sell many of the holdings in their portfolios at the valuations at which they are currently carrying them – a concern driven by several years of limited exits. However, over the past 18 months, managers have started to monetise investments more successfully. Can a savvy investor grab any low-hanging fruit before discounts start to narrow?

Before considering whether listed private-equity funds offer value at discounts, it is worth understanding the cyclical challenges that private equity has been facing. Private equity had surged in popularity over the past decade, mainly due to a strong track record. Returns regularly outperformed public market – buyout funds have achieved an internal rate of return (IRR) of 15% globally over the last ten years, according to Pitchbook. What made this look even better was that returns showed limited volatility, since they are typically based on semi-annual valuations made by managers. For example, valuations decoupled with listed markets in 2022, with private equity down by 4.1%, while global equity markets fell by 25.4%.

Private-equity funds typically exit investments through initial public offerings (IPOs), “trade sales” to another company in the same industry, or sale to another private equity buyer. Wind back to 2021 and the industry was in a Goldilocks market. Globally, exits reached over $1.7 trillion that year, according to McKinsey – more than three times the level of 2007. Funds offloaded many firms that had benefited from lockdowns or had refinanced at record low interest rates. A record number of IPOs, many made at irrational valuations, generated windfalls. Most of these IPOs later fell by 50%: Allfunds, Cazoo, Deliveroo, Dr Martens and Petco to name a few.

However, exits then halved to $800 billion in 2023. As a result, money distributed to investors was quickly outpaced by capital calls – ie, money that investors were putting into funds to pay for new investments (often commitments that they had made some years before). So there was a large cumulative gap between what investors were getting out and what they were being asked to contribute back.

How have private-equity funds fared?

With the exception of 2021, the amount of capital returned to investors is not keeping pace with the increasing scale of private equity, which has tripled in size over the last decade and doubled over the past five – total assets under management for the whole private equity industry now exceed $14 trillion. Distributions as a percentage of NAV have fallen to 15% in 2025, versus 29% on average before the pandemic, according to Bain Capital.

A typical private-equity fund has a five-year period in which it makes investments, while the fund itself has a maturity of ten to 12 years. This means the last investment made will be held for a maximum of seven years, although funds usually aim to exit an investment faster than that (eg, three to five years). However, as a result of exuberant dealmaking in 2021 and the recent slowdown in exits, private-equity funds have ended up holding a lot of companies longer than planned. “The average holding period for assets at exit is floating around seven years,” notes Bain. “The industry is still sitting on 32,000 unsold companies worth $3.8 trillion” Meanwhile, the median holding period for all investments – not just the ones being exited – is at a record of 6.3 years.

This logjam has created a significant problem for the industry. From 2011 to 2020, funds had sold 30% of their investments by year four, but just 19% of the 2021 acquisitions had been sold by 2025. These companies must be exited soon or at least undergo a “dividend recapitalisation” – taking on debt to pay out a large dividend. Managers need to return cash to investors to be able to fundraise for their next funds.

More than a third of the largest buyout funds were on the road last year to raise capital. Yet fundraising is challenging: in Europe, capital raised fell 41% year-on-year to $118 billion in 2025, according to McKinsey. It reportedly takes an average of 23 months to complete fundraising. Meanwhile, the number of funds trying to raise money is higher than ever: Bain reports there are 18,000 funds aiming to raise a total of $3.3 trillion. Maybe only a third of this target will be reached.

It is easier for blue-chip mega funds to raise money (25% of capital is raised by funds of over $10 billion), but even they need to return cash from existing funds to their investors. Distributions do not simply provide money that investors will cycle back into new funds – they also confirm that the valuations and performance are accurate. The proof of the pudding is in the eating. And of course, investors don't just want their money back – they want it back reasonably quickly, and this is becoming a point of contention. Less than 20% of private equity investors are satisfied with the pace of exits, according to a survey by data firm Preqin.

How private-equity fund exits work

Hence the need to get deals going. During the exit drought, some managers have sold holdings from one of their own funds to another. Some managed to convince investors to back continuation funds – new funds set up to specifically to buy assets from maturing funds. Continuation vehicles are now 14% of exits by value and can help to set a floor for the price of assets that must be sold. However, investors worry that they can be used to hide the real value of underperforming assets, delaying the day of reckoning. More broadly, these solutions are never going to be a substitute for an broad upswing in IPOs and deal-making.

The good news is that exits rebounded to $1.3 trillion in 2025, according to McKinsey – the second-highest year on record. While the impact of the Middle East crisis on markets remains a wildcard, it's likely that 2026 should witness a continued pick-up. Certainly mergers and acquisitions (M&A) activity has been strong in 2025 and at the start of this year. Corporates have strong balance sheets and are net buyers of assets. And while private equity buyers tended to be focused on add-on acquisitions last year, they are expected to do larger deals this year, allowing the “pass the parcel” of sales from one private equity owner to another. Of course, this requires debt markets to remain supportive.

Deserved discounts

So what does a pick-up in exits mean for private equity funds and discounts? Some investors argue that fund managers tend to value their portfolios conservatively and will surprise on the upside when selling their holdings. Recent exits are being done slightly above current valuation. However, sceptics will suggest that only the best assets are currently being sold.

In general, the existence of a discount to NAV is justified for private equity. Some funds may hold investments at cost, even where the traded price of loans or bonds issued by portfolio companies unambiguously indicate some trouble. In other cases, they may not adequately reflect market reality. While IPOs accelerated in late 2023 and 2024 – with deals including Birkenstock, Galderma, Douglas, Renk, Younited and Zabka – the trend was short-lived. Yet some private equity managers refuse to reset marks on their holdings, considering the IPO discounts needed to achieve exits to be too deep.

As a result, investors are right to challenge NAVs reported by managers. However, in the secondaries market – the buying and selling of stakes in unlisted funds – discounts have stabilised at around 15% and may tighten as buyers such as Ardian, Coller and Jefferies increase activity. Meanwhile, listed private equity funds are trading at discounts of 30% or more – and should represent a much better opportunity than buying into secondaries funds with their layers of fees.

What to buy in the private equity market

3i (LSE: III) is the oldest private equity firm in the UK. It was trading at a 70% premium to NAV in 2024, but the share price finally corrected and is now below NAV. However, the portfolio is extremely concentrated, with two-thirds of the NAV in discount retailer Action. This is being valued at an enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) of 18.5. Action's growth is slowing and the very high concentration of the portfolio makes the investment risky

Instead, we can look for trusts that are trading at a discount to NAV and are using cash from disposals to buy back their shares instead of paying high prices for new investments. For example, Oakley Capital Investment (LSE: OCI) trades at a very attractive 35% discount to NAV. HarbourVest Global Private Equity (LSE: HVPE) trades at 30% discount. It recently sold a $300 million portfolio of five buyout fund positions at a 6% discount to NAV and used some of the proceeds to buy back shares.

Pantheon International (LSE: PIN) trades at a 30% discount to NAV, which has widened significantly since December 2021. The portfolio is mature, with an average holding period above five years, and half the portfolio is in pre-2020 vintages. The NAV may also lag some of the uplift in valuations seen this year. The company announced some buybacks, as well, to narrow the discount, but is under growing pressure from activists on its shareholder roster – including AVI, Metage and Saba – to do more.

Looking beyond the UK, Eurazeo (Paris: RF) trades at a compelling 50% discount to NAV. The portfolio is very diverse in terms of sectors and strategies (buyout, growth, venture and asset-based financing) and the company also manages large amounts of third-party money. It is ahead on its exit plan, having sold 31% of its assets since 2023.

In Poland, MCI Capital (Warsaw: MCI) is a great opportunity It offers exposure to the steadily growing region of central Europe and to fintech and e-commerce sectors. The company has been listed since 2000 and the portfolio includes travel technology firm eSky, which now owns Thomas Cook. It has realised successful exits in 2025 and it trades on a 30% discount to the NAV.

Wendel (Paris: MF) trades on a 50% discount to NAV due to doubts on its strategy. It is run by an old industrial family from the north of France, similar to the Bonomi family and Investindustrial, or the Wallenberg family and EQT. However, the acquisition of private equity manager IK Partners and Monroe Capital in recent years is transformative. The last three funds of IK Partners are strong performers and should enable the firm to continue fundraising.

Once you factor in the value of IK Partners, Monroe, a stake in listed testing and inspection firm Bureau Veritas, and cash, no value is assigned to the €3.3 billion unlisted portfolio. Even though Wendel has significantly reduced its holding of Bureau Veritas – as well as exiting coatings firm Stalh (after nearly 20 years) and telecom-tower operator IHS with a 20% premium to NAV – it keeps trading at deep discount. This is a great opportunity for the patient investor.

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Flows into European-listed exchange-traded funds slowed in March, having posted a strong first two months of the year.

Investors considering where to invest had been pouring money into European exchange-traded funds (ETFs) in January and February, with net flows in each of these two months reaching €46.8 billion and €45.4 billion respectively, according to data from Morningstar.

However, this slowed to just €9.4 billion in March, with the conflict in the Middle East seemingly deterring investors from putting their money into European ETFs.

“After two very strong months, March marked a clear shift in investor behaviour,” said Jose Garcia-Zarate, senior principal at investment analysis platform Morningstar Direct. “As geopolitical tensions in the Middle East intensified and market volatility increased, investors became more cautious, pulling back from broad equity and fixed-income exposure.”

This caution was reflected in the top stocks and funds that DIY investors bought during the month of March.

Which European ETFs are attracting flows?

The predominant stance among investors during March was one of caution, but ETFs in some sectors still saw inflows.

“We saw selective interest in areas such as energy, but overall, investors sat firmly on the sidelines and prioritised liquidity and flexibility over making large directional bets,” said Garcia-Zarate.

Much of the monthly decline in flows was due to a sharp reduction in flows into equity ETFs; these fell from €40 billion in February to €8.8 billion in March.

Flows into European ETFs tracking bonds turned negative during the month, registering net flows of -€2.4 billion, compared to inflows of €5.2 billion in February and €8.8 billion in January. This was attributed to inflationary concerns weighing on credit and emerging market debt.

How did European equities perform in March?

Data from BlackRock suggests that, while European ETF flows overall dipped during March, ETFs tracking European stocks were actually among the most popular.

Among exchange-traded products (ETPs – the broad category of funds that ETFs belong to and constitute the majority of) listed in the EMEA (Europe, Middle East and Asia) region, those focused on European equities registered $3.9 billion of inflows – compared to outflows from those focused on US stocks (-$0.7 billion), Japanese stocks (-$0.6 billion) and emerging market stocks (-$0.3 billion).

BlackRock’s data also supported the view that ETF investors put their money into energy funds last month in a bid to profit from higher oil prices, with EMEA-listed energy sector ETP flows rising to their highest level on record ($2.2 billion).

The geographical balance of ETF flows doesn’t reflect the performance of respective stock market indices. The MSCI Europe index, which tracks large- and mid-cap stocks in Europe, fell 9.8% in the month to 31 March, compared to a 6.3% drop in the MSCI World index (which tracks global stocks) and a 4.9% fall in the MSCI USA index.

In other words, while ETFs tracking European equities saw greater flows than those tracking other regions, the continent’s stocks actually underperformed compared to global competitors in terms of price changes.

Saba Capital Management, an activist investor hedge fund based in New York, has a sizeable stake in numerous UK investment trusts.

Since late 2024, Saba has been using these shareholdings to try to remove the boards of some of the trusts in question. As yet, it has been unsuccessful – but a persistent campaign this year with Edinburgh Worldwide (LON:EWI) (EWIT) in particular suggests that the activist investor will be happy to bring vote after vote on its propositions.

Rather than wait until shareholder apathy kicks in and one of Saba’s motions is carried, three investment trusts – EWIT, Impax Environmental Markets (LON:IEM) and Herald Investment Trust (LON:HRI) – are laying the groundwork to offer their shareholders an exit from a potential Saba-controlled trust.

“The boards of Edinburgh Worldwide and Impax Environmental Markets have come to the same conclusion: it is better to allow shareholders the opportunity to exit their investment on fair terms than risk being trapped in a vehicle controlled by Saba,” said Richard Stone, chief executive of the Association of Investment Companies (AIC), an industry body that represents investment trusts.

Both EWIT and Impax have already proposed motions that would enable shareholders to tender up to 100% of their shares. These proposals would only require a simple majority of shareholders’ support to go through, and so can do so without requiring Saba’s support.

Herald’s board is still in talks with Saba to agree a mutually agreeable solution that would give shareholders a choice of outcome – but it is preparing a similar backstop tender offer should these talks be unsuccessful.

In the event that these tender offers come about, it would likely lead to most non-Saba shareholders tendering their shares. That would leave almost all remaining shares in Saba’s hands, effectively giving the activist control of the remaining trust. It could also lead to the trusts having to de-list from the London Stock Exchange, if free float falls below the exchange’s 10% requirement.

If you are a shareholder in any of these trusts, you might be wondering what this means for your investment. Would a Saba takeover be beneficial for you? If not – or if the trust was forced to de-list – are there similar investments you can move your money into instead?

Do you want to hold a Saba-controlled investment trust?

As far as shareholders are concerned, Saba taking control (directly or indirectly) of your investment trust may not be a bad thing. Taken at face value the company’s strategy aims to turn around underperforming trusts, leading to gains for all shareholders.

You might want to take advantage of Saba’s activist moves with UK investment trusts. If so, you could buy the Saba Capital Investment Trusts UCITS ETF (LON:UKIT), an exchange-traded fund (ETF) targeting discounted UK investment trusts which Saba launched on 5 March.

However, you might not want to hold a trust that Saba controls. For one thing, hedge funds often approach investments with shorter time horizons in mind than most individual investors. Investment trusts like Herald, EWIT and Impax are, currently, geared towards long-term investors who are happy to wait years for gains to be realised.

Saba might have a different approach, likely focused more on making money quickly. While this wouldn’t be a bad thing, it might not align with your own investment strategy, risk tolerance, or your reasons for buying the trust in the first place.

Further, recent research has questioned whether Saba’s track record suggests it can deliver on its promises for investors. Investec analysts published a note in February which highlighted that since June 2021 when Saba was appointed adviser of Saba Capital Income & Opportunities Fund I (BRW, Not Rated) – a US-based closed-ended fund – the fund has persistently traded at a discount. That discount widened from 2.3% when Saba was appointed, to 14.6% in February 2026.

Independent voting advisors ISS, Glass Lewis and PIRC have all recommended that shareholders vote for EWIT’s proposed tender offer. The voting deadline is 2pm on 8 April, though some platforms may impose earlier deadlines; the AIC believes it could be as soon as 30 March on some platforms due to Easter bank holidays.

What are your options for exiting a Saba-dominated trust?

Each of the three investment trusts that may soon be issuing tender offers have different possible alternatives for current shareholders – assuming that they want a similar kind of investment, but don’t want to be left in a Saba-controlled vehicle.

So, the approach you might take could depend on which of the trusts you hold.

If you are an Impax shareholder, you could roll your investment over into the Impax Environmental Markets (Ireland) fund. This is an open-ended fund that has an almost identical strategy to the investment trust, and as such is a very similar investment – though shareholders should note that it isn’t identical. The investment trust, for example, makes use of gearing (borrowing to amplify returns), which the open-ended fund isn’t able to do.

EWIT is effectively unique. It is the only UK-based investment trust that invests in small, long-term growth opportunities and has the ability to invest in private companies. One of its private holdings – and its largest individual holding – is SpaceX, with this exposure being one of the key reasons many investors hold the trust.

While there is no direct replacement for EWIT, Matthew Read, head of production and senior research analyst at QuotedData, recommended that shareholders could roll their investments over into Scottish Mortgage (LON:SMT) or The Schiehallion Fund (LON:MNTS), both of which are managed, like EWIT, by Baillie Gifford and have large stakes in SpaceX.

Saba has said that it will recommend the board of directors it has nominated propose three options to EWIT shareholders should they be elected:

• Option 1: Tender immediately and exit at NAV (minus costs).
• Option 2: Tender following a potential SpaceX IPO or liquidity event – but prior to any potential change in investment mandate – at NAV minus costs.
• Option 3: Retain your investment in EWIT.

Saba has previously maintained that the board of directors it is nominating is fully independent, so there is no guarantee that the board would follow through on Saba’s recommendation if elected.

There is, similarly, no direct replacement for Herald. But unlike Impax or EWIT, its board remains in talks with Saba. Shareholders may yet be spared the choice of selling their shares or remaining in a Saba-controlled trust.

Could tendering your investment trust shares trigger a tax bill?

One final thing to consider before tendering your shares is whether doing so could leave you liable to paying a tax bill.

Tendering an entire shareholding in one go could easily leave you liable to paying capital gains tax on the profits, so this is something you will need to consider and plan for if you are a shareholder in these trusts.

Herald, though, has stated that it is attempting to find a tax-efficient way for shareholders to exit their positions, though it has stressed that there is no guarantee that this will be possible.

Entrepreneurial real estate investment trusts (REITs) are taking advantage of the UK property sector's quiet upturn despite all the gloom about the economy.

“Last year saw a positive total return of 6.7% across all sectors, led by 7.8% for industrial and 8.9% for retail,” says Michael Morris of Picton Property Income (LSE: PCTN). “Offices are still struggling, but returns were still positive. Rental growth was also positive across all sectors, owing to the tightness of supply.”

The £405 million REIT has a portfolio of 46 assets valued at £699 million, mostly in the southern half of the UK. Two-thirds are in industrial-warehouse logistics, 21% in offices and 12% in retail and leisure (such as out of town retail parks).

The portfolio yield is 4.9%, but there is potential for higher rents as current leases expire, which would take the yield to 7.4%, says Morris. What's more, 17% of the portfolio is vacant as buildings are being refurbished, which will enable “meaningful” increases in rents.

Focus on smaller REITs

“The direct property market has been witnessing a recovery since September 2024, with valuations improving quarter on quarter driven by consistent rental growth across all real-estate sectors in the UK,” says Richard Shepherd-Cross of the £385 million Custodian Property Income (LSE: CREI). “We see real opportunity in the market at the moment.”

Custodian's £625 million portfolio is invested across an even broader range of regional property: 43% industrial; 22% retail warehouse; 14% offices; 7% high-street retail and 14% other. With 175 properties, these are on average smaller than Picton's. Rental growth last year was 2.5%, with the strongest growth in industrial logistics and retail parks.

Custodian owns properties that are too small for institutional investors. This is the area in which most of Britain's family property companies operate – a type of investor who often encounters challenges as time passes. The financial requirements of family members diverge; the portfolio lacks scale; management is time consuming; expensive expertise has to be bought in; and tax complications arise.

So Custodian is targeting deals with families who want to exit. By taking some or all of their payment as a tax-free share-for-share exchange at net asset value (NAV), the family members end up with shares in a liquid, diversified and professionally managed vehicle. The REIT has so far done three deals totalling £66 million and is looking for more. There are “tens of dozens” of family-owned property companies and Custodian is “actively pursuing a number of them”, says Shepherd-Cross.

Attractive yields

Picton has been performing notably well, at least until the recent wider market setback. The shares rose 16% last year and are still up 7% in 2026; Custodian gained 12% in 2025, although it is down 5% this year. Yet neither are expensive: Picton trades at a 23% discount to its end-December NAV, while Custodian is on a discount of 20%. Both offer an attractive yield – 4.8% and 7.6% respectively – which should continue to grow.

Both also have healthy balance sheets. Picton has a loan-to-value ratio of 23%, despite investing £6.5 million last year and spending £25 million on buybacks at an average discount to NAV of 25%. It is paying a weighted average interest rate of 3.7%, with an average of six years to maturity. Custodian has a loan-to-value ratio of 26% and an average cost of debt of 4%, with 70% of this fixed at an average rate of 3.3% and an average term of five years.

Picton may exit the market sooner than it should: the board has recently launched a strategic review and has received a number of proposals. Yet it is clear that both it and Custodian have solid prospect on their own merits, driven by rental growth, investment and acquisitions.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Seraphim Space Investment Trust (LSE: SSIT) was the best-performing investment trust in 2025 and is up by a further 10% this year. This is a fantastic turnaround for a company that was struggling to attract much attention until around six months ago.

Seraphim is one of the few investment vehicles to provide private investors with access to early-stage space companies. The space market is worth around $600 billion annually, much of it controlled by governments. Global defence contractors such as Lockheed Martin have a significant foothold, but the universe of pure-play public and private businesses is small.

If you exclude SpaceX – which is aiming for a $1.5 trillion initial public offering (IPO) – the total value of pure-play public and private companies is about $160 billion. That's not a huge figure for a market that's expected to triple in value to $1.8 trillion by 2035, according to a report from consultants McKinsey – the bull case suggests it could be worth $2.3 trillion.

Enter Seraphim, which is run by a venture capital firm of the same name that focuses solely on space technology. The £342 million trust is tiny by global standards, but it's unique – a fact that has suddenly dawned on investors. The investment trust structure is well-suited to this kind of investment: it provides a permanent pool of capital, so the manager doesn't have to worry about withdrawals and can focus on finding the best investments, while investors have liquidity and don't have to lock up large sums for extended periods.

Investors should take a second look at Seraphim

The trust launched in 2021 with an oversubscribed IPO, but by mid-2023, it was trading on a discount to net asset value (NAV) of over 70%. However, this has gradually reduced, before flipping to a premium for most of this year. That may partly be due to the hype around the SpaceX IPO (a stock that it does not hold), but also reflects the success of the trust's own portfolio companies.

Last year, its portfolio returned 20%, led by a 25% rise in satellite firm ICEYE, its largest holding. ICEYE, the leading manufacturer and operator of synthetic aperture radar (SAR) satellites, has been contracted to supply Germany's armed forces with space-based reconnaissance data.

Seraphim owns just over 5% of ICEYE, which is now valued at $3 billion and is targeting revenue of more than €1 billion this year, up from €250 million last year. If the valuation grows at anywhere near the same rate, Seraphim's holding could be worth more than £500 million within 12 months. As a bull-case comparator, SpaceX is targeting an IPO at 100 times sales. If ICEYE can achieve a valuation anywhere near this level, Seraphim's holding could be worth billions, catapulting the trust into the FTSE 100.

ICEYE gained most attention last year, but Seraphim's largest gain in percentage terms came from communications platform All.Space, which nearly doubled its value. All.Space has announced a partnership with Aalyria, a space communications spin-out from Google, and secured funding from the European Space Agency's Navigation Innovation and Support Programme to develop navigation that works when GPS is jammed. Geolocation firm Hawkeye 360 also performed well, with its value jumping 65% after it launched its fifth satellite cluster and completed a $150 million funding round.

For most of its life, Seraphim has rightly been viewed as a high-risk vehicle with limited visibility into future growth. However, developments across the portfolio last year suggest its key holdings have reached a level of maturity that's removed much of the initial risk associated with early-stage start-ups. Investors who have overlooked the trust in the past might want to give it a second look. The portfolio is only just getting ready to take off.

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Scottish Mortgage (LON:SMT), the £15.2 billion investment trust that focuses on high-growth innovation companies, is proposing a shake-up to how it invests in private companies.

Consistently one of the most popular investment trusts among DIY investors, Scottish Mortgage invests in companies it sees as long-term winners thanks to their innovative technology and ability to grow in value over the course of years or even decades.

Some of the most promising investments on that front are private companies; those that haven’t yet listed publicly and whose shares therefore can’t be bought and sold on a stock exchange. The investment trust’s largest holding as of 28 February, Elon Musk’s space exploration firm SpaceX, falls into this category.

Shareholders in Scottish Mortgage will vote on a change to the trust’s rules at an upcoming extraordinary general meeting (EGM) that, if passed, would allow its managers greater flexibility when buying private companies.

“Our role is to be patient, long-term partners to exceptional private companies as they continue to scale,” said Tom Slater, manager of Scottish Mortgage. “From time to time, market movements can restrict our ability to make further investments in private companies.”

What changes is Scottish Mortgage proposing to its investment process?

At present, Scottish Mortgage’s rules permit it to invest up to 30% of its assets in private companies.

But private companies can be difficult to value – for reasons which we’ll explain in greater detail below. The upshot, though, is that a 30% cap could restrict Scottish Mortgage’s ability to pursue promising opportunities in private companies or support ones it has already invested in when they raise more capital.

This is exacerbated by the fact that SpaceX currently accounts for 15.4% of Scottish Mortgage’s portfolio - more than half the current private allowance by itself. Its third-largest holding, TikTok owner ByteDance, accounts for another 4.1%, meaning that between them these two companies account for nearly two thirds of Scottish Mortgage’s entire permitted private company allocation.

Scottish Mortgage’s board will recommend that shareholders vote through a proposal giving the trust’s managers the discretion to allocate up to £250 million in additional private investment capacity. This would enable them to make new or follow-on investments in private companies when they see an opportunity, even if that means bringing its private company exposure above 30%.

“This proposal gives the board additional flexibility to act in shareholders’ long-term interests by permitting us to support our private holdings when it matters most, while remaining selective about new opportunities,” said Slater.

From the firm’s 2027 annual general meeting onwards, Scottish Mortgage shareholders will vote annually on whether or not this additional flexibility is continued.

Why are private companies hard to value?

Shares in private companies don’t trade on stock exchanges, and therefore don’t change in value day by day like those of a public company (like Nvidia, or indeed Scottish Mortgage).

Instead, their valuation changes at much less frequent intervals – usually whenever they raise fresh capital or, occasionally, in a secondary share sale event (where existing shareholders, such as company employees, have a specified window in which they can sell some of their shares).

Because a lot of time passes between these events, and a lot can happen during that time, the valuation of the company can change a lot in between them.

SpaceX, for example, was valued at around $800 billion during a secondary share sale in December, but it is widely believed to be targeting a valuation of nearly double that at a potential IPO later this year.

Investment trusts and other investors can only value private companies on their books at their most recent valuation.

Large uplifts in valuations between these events can lift the allocation in a trust like Scottish Mortgage beyond their maximum allocation even without buying any new shares. This is good news in some respects as it means these early investments are paying off, but it can also put fund managers in a position where they can’t buy new private companies (or, in the case of follow-on purchases, more shares in private companies they’ve already invested in) without being forced to sell off some of their portfolio holdings.

Scottish Mortgage’s board hopes its proposals will enable it to navigate this and be able to continue to both support its existing private investments, and take advantage of new opportunities as and when they appear.

Pershing Square Holdings (LSE: PSH) is an anomaly. The investment trust is trading at a discount of 25% to net asset value (NAV), despite having returned 101% over the five years to the end of 2025 and 14% over one year. Yet this is no obscure or illiquid fund or niche strategy: it is a large, liquid investment trust with a market value of nearly £8 billion investing in listed larger companies in the US, the world's largest and (until 2025) top-performing market.

Pershing Square Holdings, which was listed in London in 2014, is run by Pershing Square Capital Management, a US hedge fund founded in 2004 by Bill Ackman. The substantial majority of its portfolio is invested in eight to 12 core holdings (at present, a total of 15 holdings are currently listed, but the size of each position is not disclosed). These holdings consist of either undervalued growth or corporate turnarounds. In either case, Pershing Square is an activist investor, happy to get involved, advise, pressure and propose management changes.

This is a sufficiently small portfolio that one can easily go through them individually to see Ackman's thinking. As of December, 10% of capital was invested in Meta. “Pershing believes that market concerns around Meta's capex spending on AI-related projects is misplaced and that the market is underestimating Meta's long-term upside potential from AI,” says the annual report. An opportunistic investment in Amazon in April is performing well – Ackman does not believe that its multiple reflects sustainable earnings growth of 20%, attributable to declining unit shipping costs and a doubling in data centre capacity by 2027.

The valuation of Alphabet (Google's owner) is still “quite reasonable” with “high teens earnings growth achievable indefinitely”. PSH invested because they thought Google's leading position in AI was being under-estimated. Universal Music is trading strongly but the stock has been weak due to “technical factors”. Ackman believes an imminent US listing will lead to a rerating, with the shares currently trading at the lowest earnings multiple (around 20) for four years.

Meanwhile Restaurant Brands – the owner of Burger King – is “outperforming a tough market”, helped by new openings and consumers trading down. Hotel chain Hilton trades on “30 times next year's earnings” but earnings are growing strongly, helped by its capital-light franchising model, strong cost control, share buybacks of 5% per annum and growth in units around the world. Car-rental group Hertz is “making progress on its turn-around” with the potential to generate cash flow, currently zero, of $1 billion per annum.

Transport firm Uber is a new holding “on a mid-20s multiple, which is extremely cheap given a high rate of earnings growth”. Growth is accelerating and it is one of three players in the autonomous vehicles market. Financial group Brookfield “is poised for an excellent year” and has bought pensions and annuities firm Just Group in the UK.

Over the past year, Pershing Square has increased its stake in US property group Howard Hughes to 47%. Howard Hughes' speciality is creating new towns, such as one 35 miles from Las Vegas, retaining the commercial property but selling residential land to developers. There are two projects in Texas and one outside Phoenix, Arizona. However, the plan here is to use the group's cash to buy an insurance company, with the aim of mimicking Warren Buffett's Berkshire Hathaway by investing the cash flow from insurance.

On the downside, Ackman admits to having held on too long to the last 20% of the trust's holding in restaurant group Chipotle and to having underestimated the scale of the challenge of turning around Nike. Both holdings have been sold.

Pershing Square's bet on government-sponsored enterprises

This all adds up to a compelling investment story, but Ackman has a knack of adding significant value through investment coups, such as hedging the portfolio ahead of the pandemic shock in early 2020 and the acquisition of its stake in Universal Music at a low price in 2021. The latest is the bursting into life of positions bought in 2013 at around $1 a share in the Federal National Mortgage Association and the Federal Home Loan Corporation, generally known as “Fannie Mae” and “Freddie Mac”. These are government-sponsored enterprises (GSEs) whose purpose is to bundle mortgage loans into tradable securities with an implicit government guarantee. This enables lenders to reinvest in new mortgages, thereby expanding their availability.

In the run-up to the 2008 financial crisis, mortgage underwriting standards became very loose. Fannie Mae and Freddie Mac suffered large losses and were bailed out by the US government at a cost of $190 billion. Under the terms of the bailout, they had to pay a 10% cash dividend on preferred stock and grant warrants entitling the US Treasury to 80% of the ordinary shares. However, the pair kept having to borrow more from the Treasury to pay the 10% dividend. Hence in 2012, the Obama administration amended the terms so that the Treasury simply received 100% of quarterly profits.

This “net worth sweep” ended in 2019, with Fannie Mae and Freddie Mac then retaining their earnings to build up their capital. By that point, the Treasury had received $301 billion of dividends, giving it an 11.6% rate of return and $25 billion more than owed under the original plan for a 10% dividend.

The government's position is that it still owns the preferred stock (and the warrants for common stock) and is entitled to interest foregone since 2019. Ackman instead argues that the preferred stock should now be regarded as fully repaid. This would, in effect, leave the US Treasury with around 80% of the ordinary shares.

At present, the shares trade over the counter, but Trump, treasury secretary Scott Bessent and commerce secretary Howard Lutnick have signalled they believe it is time to re-list them on the New York Stock Exchange. The attraction for the administration may be partly ideological (in 2021, Trump described the sweep as the US government “steal[ing] money from its citizens”) but also because they could be worth a significant amount.

Ackman estimates that an 80% stake is already worth $300 billion and believes that could easily double or treble from here. So he argues that the Treasury's warrants should be exercised and the shares listed on the NYSE but “now is not the right time to sell” the government's stake. He also wants to see a continued “conservatorship” (ie, regulatory oversight) by the Treasury to keep the firms focused on guaranteeing mortgages without the past practice of taking on new lines of business, and advocates a requirement for significantly higher reserves than in the past.

Huge upside for Pershing Square

Why does this matter for shareholders in Pershing Square? Those Fannie Mae and Freddie Mac shares, which were bought for a pittance in 2013, appreciated 207% and 284% respectively in 2024. At that point, Ackman estimated “an upside of five or six times in two to three years”. From the disclosed portfolio attribution for 2024, it is possible to estimate that the holdings accounted for between 5% and 6% of the portfolio. They have since nearly doubled. Net of performance fees and taking account of the appreciation of the rest of the portfolio, the two holdings are likely to account for nearly 10% of the portfolio today.

Ackman estimated late last year that they were trading on just 3.5 and 2.5 times next year's earnings. At his “illustrative” post-listing target of over $40 a share each (earnings multiples of 16 and 13), those holdings would quintuple in value from their current share prices. Net of the manager's profit share, that would add at least 25% to PSH's NAV. With the rest of the portfolio also contributing and the discount likely to fall sharply on such a coup, the upside to the share price would be significantly greater.

Shares in Fannie Mae and Freddie Mac peaked at a 17-year high in September, but have retreated as the Trump administration appears to be focused on other priorities. Still, it is surely not going to look a gift horse in the mouth. If and when it decides to re-list Fannie Mae and Freddie Mac, Pershing Square Holdings's shares are likely to jump.

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Last year was a good one for investment trusts. They saw a total return of 16.1% (as measured by the FTSE All-Share Investments index, which excludes 3i) – well behind the All-Share index total return of 24%, but ahead of the more representative MSCI All Countries World index at 14.4%. Performance was helped by about a 2% narrowing of the average discount to net asset value to 12.5% and also by the use of borrowings by trusts to enhance performance.

Over the longer term, as Christopher Brown, head of investment companies research at JPMorgan, points out, wherever closed-end funds are run alongside similar open-ended funds, the vast majority of the former have outperformed, with ten-year average annualised excess returns of 1.5%.

There are about 300 investment trusts with total assets of £265 billion, according to the AIC trade body. This represented a small fall in the year, with the increase due to performance cancelled out by equity withdrawals. Size varies from a few million pounds to the £13.6 billion market value of Scottish Mortgage; there are five in the FTSE 100 and 85 in the FTSE 250. Inevitably, performance varies dramatically; in 2025, Golden Prospect Precious Metal gained 165% and Seraphim Space 120%, while Macau Property lost 74% and Digital 9 lost 69%.

Investment trusts at a crossroads

Despite the strong overall performance, “a record £18.9 billion of net assets exited the sector”, says Brown. Share buybacks accounted for £10.2 billion and “there was a wave of managed wind-downs and liquidations”. There were also numerous mergers, usually involving a partial return of capital. Against 27 names disappearing (after 24 in 2024), there was only one new issue, that of Achilles Investment, which raised £54 million. Fundraising by existing trusts totalled £530 million.

Brown argues that “consolidation leaves behind a better-quality sector”, but it also reduces choice and competition. It may make sense to merge two competing trusts under the same management company, such as Throgmorton and BlackRock UK Smaller Companies, but a little internal rivalry can be beneficial and moving the management contract elsewhere is an alternative.

“The sector is at a pivotal crossroads, but all is not gloom,” says Brown. Regulatory hostility has diminished as a result of changes to cost-disclosure rules (after a hard-fought lobbying campaign), but listed investment companies have still been excluded from the Pension Schemes Bill as qualifying assets for defined-contribution default pension funds. Wealth managers and other professional investors dislike what they regard as the sub-contracting of their job to another fund manager, even if it results in better performance or exposure to an area of the market they do not cover.

Yet closed-end funds provide rare access to unlisted giants, such as SpaceX, as well as to property, infrastructure and other illiquid assets. The government's preference for theoretically semi-liquid “long-term asset funds” (LTAFs) shows that the lessons of past fiascos with open-ended property funds have not been learned, or have been ignored. Brown questions whether semi-liquid funds offering redemptions of just 5% per quarter will be able to cope with market volatility and questions the practice of private-equity LTAFs buying secondary investments at a discount and then marking them up to net asset value.

Good performance has continued into 2026, with a 1.9% total return up to mid-February. The S&P 500 has been flat in sterling terms, but other markets, notably the UK, emerging markets and small and mid-caps, have continued to perform well. Yet, says Brown, £8.9 billion worth of strategic reviews, managed wind-downs and mergers are in the pipeline, not including the merger of BlackRock's two smaller companies trusts.

The worst of times is the best of times

The reality is that investment companies are performing well, not because of net buying, but because trusts are shrinking faster than investors are selling. It's not just trusts that investors are selling; there have been £119 billion of net outflows from UK equity-focused and UK-domiciled open-ended funds in the last ten years, of which £74 billion has been in the past four years. Some of this has gone into passive funds, such as exchange-traded funds (ETFs), and some into US/global funds, but UK-based investors are net sellers, especially of their home market. Investment trusts focused on the UK are only a modest part of the total, but all of them are UK-listed, so are caught up in the rush for the exit.

Contrarian investors will regard that as a reason to be relaxed about investing. In time and with continuing good performance, net buying will return to the investment trust sector, discounts will become much narrower or disappear, and there will be an avalanche of issuance, including of new trusts in a cycle that has been repeated multiple times in the last 50 years. At that point, but probably not before, it will be time to start battening down the hatches and preparing for tough times.

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The protracted saga between Saba Capital Management and Edinburgh Worldwide (LON:EWI) may finally be drawing to a close, as the board of the investment trust has issued a 100% tender offer that can pass without needing Saba’s support.

Saba, an activist investor hedge fund based in New York, has accumulated positions in several UK investment trusts over recent years. As well as launching an exchange-traded fund holding these trusts, Saba has repeatedly brought resolutions aimed at displacing the board of several of them, especially Edinburgh Worldwide (EWIT).

These have all been unsuccessful to date, with the latest vote having taken place on 26 January where, excluding Saba’s own votes, EWIT’s shareholders defeated Saba’s proposals with over 53% of votes cast in favour of the current board. Excluding Saba’s own votes, nearly 93% of shareholders voted against Saba.

But Saba then announced that it would bring another vote on the board of Edinburgh Worldwide at the company’s upcoming AGM.

In response, EWIT’s board has proposed a tender offer for up to 100% of shares – which could effectively mean the trust is wound down – while offering shareholders the ability to retain any potential upside from the trust’s largest holding, SpaceX, in the case of a future listing.

“We have reached the end of the road with Saba's obsession to break the status quo and its continuing disregard for the expressed wishes of other shareholders,” said Jonathan Simpson-Dent, chair of EWIT. “This regrettable but necessary step is intended to protect shareholders from being trapped by Saba, offering a significant cash exit close to [net asset value, or NAV] while preserving exposure to SpaceX until a future liquidity event, after which shareholders would receive a further cash payment.”

The tender offer requires a simple majority of votes to proceed, and therefore isn’t dependent on Saba voting in favour.

How will Edinburgh Worldwide’s proposed tender offer work?

Assuming the tender offer is voted through, eligible shareholders will be able to tender up to 100% of their shares in Edinburgh Worldwide.

Those who choose to do so would receive approximately 85% in cash at close to NAV. This would be funded by the sale of EWIT’s more liquid assets. They will also receive approximately 15% deferred cash based on the realised value of SpaceX, once it has listed, which the board anticipates will happen within 12 months.

If most shareholders support the proposal (as the board has encouraged them to) and then tender all of their shares (as EWIT’s directors intend to with theirs) then the quantity of shares available on the market could fall below the 10% threshold that FCA rules require, effectively forcing the trust to wind up.

The tender offer requires a simple majority of votes to proceed, and therefore isn’t dependent on Saba voting in favour.

What is different about Edinburgh Worldwide’s tender offer?

Saba previously recommended that the directors it has nominated offer EWIT shareholders a chance to exit the trust at 99% of NAV if they were voted through to take over its management.

Edinburgh Worldwide claims that its latest proposal differs from Saba’s in two key ways.

Firstly, under EWIT’s proposal, shareholders would retain exposure to SpaceX in the event of its anticipated IPO. This would likely see a significant uplift in its valuation from the $800 billion at which it last raised funds. Recent reports suggest SpaceX’s valuation at IPO could be as high as $1.75 trillion, but this is currently not reflected in EWIT’s NAV.

EWIT also highlighted that it can fully commit to honouring the tender offer, but that Saba can’t if it is sincere about the independence of the board members it has nominated.

Could the FCA change the rules around activist investors?

In proposing the tender offer, EWIT’s board made it clear that this is not the solution it wanted and expressed frustration at Saba persistently bringing repetitive proposals despite these being voted down by the majority of the trust’s shareholders.

“The current regulatory framework permits a determined minority shareholder to effectively gain board and managerial control through repeated actions which explicitly oppose the desires of other shareholders,” said Simpson-Dent. “While we have galvanised the FCA into action, addressing this systemic problem will take longer than Saba's repeat smash and grab cycle. Regrettably, we believe it is only a matter of time before Saba succeeds.”

The Association of Investment Companies (AIC), an industry body that represents UK investment trusts, has reiterated calls for the FCA to adjust the rules to prevent these kinds of repetitive minority shareholder campaigns.

“The FCA needs to take immediate action on the Listing Rules to protect the long-term interests of shareholders,” said Richard Stone, chief executive of the AIC. “The current rules are not fit for purpose because they allow a minority shareholder to repeatedly attack an investment trust. Unless the FCA steps up this could happen again and again and we could see more UK-listed companies disappear.”

EWIT appears to have decided, though, that if any reform to the rules materialises, it will be too late to prevent Saba’s latest attempts to displace the board.

When will shareholders vote on Edinburgh Worldwide’s tender offer?

There is currently no date set for the vote on Edinburgh Worldwide’s tender offer. The investment trust said a circular with the details of the vote will be published in due course.

Nick Train, Terry Smith, James Anderson and Harry Nimmo are among the most celebrated British fund managers. All four built outstanding records in their respective styles by employing a high-conviction investment approach with concentrated portfolios.

What “concentrated” means will vary. It could be 20 larger stocks. It could be as much as 50 if you are looking at riskier small caps. It could be a heavy focus on a particular sector. Regardless, it isn't for the faint of heart, but there are plenty of managers and funds that have outperformed by picking the right basket of businesses.

Warren Buffett, perhaps the most famous investor of all time, has long said that it only takes a handful of “wonderful companies” to beat the market in the long term – although he has also said that most people should simply buy index funds.

Concentrated portfolios: the hedge fund way

Very concentrated portfolios are common with many top hedge fund managers. Chris Hohn's $50 billion TCI Fund Management owns fewer than ten stocks according to public filings. Visa accounts for nearly 20% of the disclosed portfolio. Bill Ackman's Pershing Square Capital Management, the hedge fund behind the London-listed investment trust of the same name, has just 11 holdings. While the Bill & Melinda Gates Foundation Trust is not a hedge fund, it is also highly concentrated, with 80% of its equity assets in five holdings.

This can result in exceptional returns. London-listed Pershing Square (LSE: PSH) has generated an annualised net asset value (NAV) return of 325%, or 14% over ten years. Other top performers include 3i (LSE: III), whose portfolio is dominated by European discount retailer Action and activist UK small-cap trust Rockwood Strategic (LSE: RKW) with 25 holdings in total. High-flying sector trusts such as Polar Capital Technology (LSE: PCT) are also effectively very concentrated, even if they hold a larger number of stocks.

Yet we can also see many concentrated portfolios go wrong. Take Train's Finsbury Growth Trust (LSE: FGT), which has 85% of NAV in its top-ten holdings. This has had a very poor five years since Train's quality-growth style went out of favour. Smith's Fundsmith Equity has also been notably weak. Scottish Mortgage (LSE: SMT), previously run by Anderson, had a very tough 2022 as its high-conviction growth approach struggled, although it has since improved.

Concentrated portfolios can provide unreliable results

So do concentrated portfolios work on average? Not reliably, according to financial data provider Morningstar. It looked at 5,800 European-domiciled equity funds from 2015 to 2025 and evaluated each fund's “portfolio boldness and diversification by integrating stock, sector, and return-based factors”.

The results showed that “on average, there is little to no meaningful relationship between concentration and returns” and “concentrated funds have a substantially wider spread of outcomes, with fatter tails on both sides”. In other words, while concentration can lead to outperformance, it can also result in underperformance with “similar or greater frequency”. There is also a “higher probability of severe losses”. Highly concentrated funds are also more expensive than diversified funds (and far more than passives), which acted as a further drag on returns.

Ultimately, Morningstar found that low-concentration portfolios outperformed all high-concentration portfolios in all categories over the ten years to the end of 2025. The difference was minimal in emerging markets, but in the global and US sectors, it “amounts to approximately one-tenth of total ten-year returns, which is financially meaningful”. In short, managers who consistently outperform with a high-conviction portfolio are rare. So investors should be cautious when assuming that a hot streak will continue.

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