The MSCI Emerging Markets index has become distorted. Three tech heavyweights – Taiwan Semiconductor, Samsung Electronics and SK Hynix – now account for almost 30%. As a result, Taiwan and South Korea make up nearly half the index, and Asia totals 80%, while tech is 44%.

Returns have been strong lately, driven by the tech names – up 90%, 238% and 422% respectively in the last year. Still, this is not what investors think they are getting when they buy into emerging markets.

How to find domestic growth in emerging markets

Fortunately, there are trusts that offer more diversification. Utilico Emerging Markets (LSE: UEM) invests in infrastructure, utilities and related assets so it has no exposure to the tech giants. The geographic balance is also very different: Brazil is 22%, other Latin America 17% and Eastern Europe (including Greece) 9.5%. UEM is notably underweight China with just 9% there, mostly in Hong Kong, versus 20% in the index. “We find China very difficult, as regulations can change overnight,” says co-manager Charles Jillings.

Stock selection is key as “mismanagement can destroy a good asset”, he says. “If we can't find value in a country or sub-sector, we don't invest.”

The largest holding is Orizon Valorização de Resíduos, a Brazilian waste management company, followed by International Container Terminal Services, which is based in the Philippines but operates in 19 countries.

The spread of the portfolio is further shown by holdings that include internet infrastructure company Korea Internet Neutral Exchange, Grupo Aeroportuario del Pacífico, which operates airports on Mexico's Pacific coast, and Piraeus Port in Athens.

This gives UEM much higher exposure to domestic growth in emerging markets than the global, tech-focused index, often at attractive valuations.

Sonatel, a leading mobile phone company in West Africa, growing at 12%-13% a year thanks to rising customer spend but is trading at just 2.7 times cash flow, says Jillings.

The lack of tech means UEM has lagged the MSCI Emerging Markets over one and three years (though is still up by 14% and 34% respectively) but has returned 9.5% per year since 1995, ahead of its benchmark. The shares are on a 10% discount to net asset value (NAV) and yield 4.3%.

Back smaller stocks in emerging markets

Mobius Investment Trust (LSE: MMIT) offers a different angle, investing in “dynamic small and mid-sized companies” rather than the giants. The £136 million portfolio, which holds just 25-30 stocks, has minimal overlap with the MSCI Emerging Markets index.

While MMIT still has 38% of the portfolio invested in Taiwan and Korea and 31% in technology, this has been reduced in favour of industrials and financials. China accounts for less than 3% of the portfolio – an underweight that resulted in 22% underperformance of the MSCI Emerging Markets Mid Cap index last year but has been rewarded with 12% outperformance this year.

Meanwhile, India has risen to 28% this year. While foreign investors have been selling, domestic investors have been buying, notes lead manager Carlos von Hardenberg. The Nifty 50 index now trades 10% below its 2024 peak, even though economic growth is still 7.5%-8%, inflation is just 4% and interest rates are 5.25%. The rupee has lost 10% in the last year, but this is benefiting exports and import substitution.

Since mid caps have lagged large caps, returns of 33% over one year and 44% over three years are behind the MSCI Emerging Markets index, but mid caps are due a catch-up. The portfolio should offer 23% operating margins for the portfolio and annualised earnings growth of more than 45% over the next five years, estimates von Hardenberg. The shares trade on a 10% discount to NAV and yield 1%.

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.

We last updated the MoneyWeek ETF portfolio in July, when we added one new position, bringing in WisdomTree True Emerging Markets (LSE: WEMP) to balance the growing technology tilt in our long-standing iShares Core MSCI Emerging Markets (LSE: EMIM) position.

We now have 15% in emerging markets, which sounds high – but the Korea and Taiwan element (which is around 50% of EMIM) is now a play on the AI investment cycle to such an extent that it no longer seems to make sense to think of them as subject to the classic emerging-market trends. Combined, we have about 10% in emerging markets and about 5% highly geared to AI capex. The latter is something to keep in mind if the AI boom ends and we want to cut exposure.

There has been plenty of volatility since then in geopolitics and in markets, especially in bonds. However, most of these developments have had relatively little bearing on the portfolio because we were already positioned cautiously towards them. For example, our bond holdings are very short-dated, precisely because we were concerned about the risk of longer-term yields getting untethered.

That said, our real-estate holding Xtrackers FTSE Developed Europe Real Estate (LSE: XDER) is struggling. Higher energy costs, higher inflation and higher interest rates over the medium term will harm sentiment and stall the wider economic recovery in general, while also pushing up refinancing costs and lowering valuations for this sector in particular. Four years from the point when rates began lifting off the floor, investors still seem to get rattled whenever they are reminded that today's rates are likely to be the new normal.

What we're changing in the MoneyWeek ETF portfolio

To my mind, there is value in European real estate – the number of takeovers in the sector (especially in the UK) suggests that trade buyers see opportunities where public markets don't. However, it's not at all clear when sentiment might change. We don't want to sell out entirely, but there is a case for taking it from 10% to 5% while we see how it develops. Like everything else in the MoneyWeek ETF portfolio, this is not a decision made in isolation: when you look at the positions, we are at the top end of medium risk at a time when caution may be wise.

We could consider adding a fund like iShares Global Infrastructure (LSE: INFR). There is much going on in this once-sleepy sector (see issue 1320). That said, this is also selling off as long bond yields rise. For now, what stands out is that the underlying bonds in iShares $ TIPS 0-5 GBP Hedged (LSE: TI5G) offer a 2.8% real yield with limited interest-rate risk at a time when higher inflation is a growing threat. So we will temporarily add 5% from XDER plus the remaining 5% from our uninvested cash to this, taking it to 20% in total.

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With Personal Assets Trust (LSE: PNL), Capital Gearing (LSE: CGT) and Ruffer (LSE: RICA) all losing value after inflation, many investors who turned to wealth preservation trusts over the past five years will have been disappointed.

In that time, UK inflation – as defined by the consumer price index (CPI) – has averaged 5% per year, or 27.5%. Meanwhile, Personal Assets is up 20.8% on a net asset value (NAV) basis to the end of August or 3.85% per year. Ruffer has gained 20% (3.7% per year) and Capital Gearing has returned 11.5% (2.2% per year).

The key selling point of these trusts is to protect wealth in all market environments. You would not expect them to outperform during such a strong bull market for stocks, but even so, these returns look underwhelming set alongside simple, low-risk alternatives. For example, the Royal London Short-Term Money Market Fund has returned 3.7% per year over the past five years.

Long-term readers will know that Personal Assets Trust has been a core holding in the MoneyWeek investment trust portfolio since its inception in 2012. It was included because its defensive mandate complemented the other, equity-heavy trusts in the portfolio. And historically, managers Sebastian Lyon and Charlotte Yonge of Troy Asset Management have done a good job of protecting capital. The trust has returned 62.7% on a NAV basis (versus inflation of 41.7%) over ten years, and 247.4% (versus inflation of 66.7%) since Troy took charge in March 2009. So why have recent returns been weaker?

Personal Assets Trust is trailing the bull market

Personal Assets Trust invests across a range of asset classes. At present, stocks are about 40% of the portfolio, inflation-linked bonds roughly 30%, conventional bonds about 20% and gold around 10%. This has varied significantly – in the latest quarterly report, the managers note that the percentage in stocks has varied between the low-seventies in 2009 and the low-twenties in 2022.

This points to the first headwind; the equity allocation has been relatively low at a time when stocks are booming. To make matters worse, the trust favours cash-generative, high-quality equities, but we are not in a market that favours such stocks or offers much help to stockpickers.

Instead, the top-ten tech stocks account for over 40% of the US S&P 500. US equities account for over 70% of the MSCI World. The result of this concentration is that big tech accounted for 53% of the market's return in 2025, says JPMorgan. It is all but impossible for Troy's strategy to keep up in this scenario.

A higher-for-longer interest rate environment

At the same time, we have moved into a higher-for-longer interest rate environment. Personal Assets Trust did well in the zero-interest-rate environment of the 2010s and early 2020s, but cash is now a higher hurdle to beat. To make things trickier for bond investors, longer-term bonds have plunged as long-term expectations for interest rates have risen. This applies to both conventional bonds and inflation-linked ones.

Personal Assets Trust currently holds very short-dated bonds with an average duration of 2.5 years (a bond's duration is the weighted average time to receive all the promised cash flows, both interest and principal). So its portfolio is far less exposed to higher rates than a typical bond fund. Still, this positioning may make it hard to earn much more than a near-cash return from its bonds in the short term (although short-dated inflation-linked bonds should quickly pass on any inflation spike).

The timing of the 2021-2022 inflation surge, rapid rate rises and unruly market adjustment in response means five-year records should be interpreted with caution. Three-year returns look better (22.7%, versus 8.8% for CPI). Still, investors – including us – need to watch these trusts to see if they will now bring what they promise to a portfolio again.

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Fund flows from UK retail investors were positive during August for the tenth consecutive month, but some sectors have seen outflows.

Latest data from the Investment Association (IA), an industry body representing the UK’s fund managers, shows UK-based investment funds registered £894 million in net sales to retail investors during August, in marked contrast from the £1.8 billion in outflows registered in the same month last year.

“Despite the summer break typically slowing flows and a worsening outlook for price inflation… investors kept their cool and carried on investing through the warmer weather,” said Miranda Seath, director, market insight & fund sectors at the IA.

^{Source: The Investment Association}

August’s positive figure brings the total net retail fund flows in the first eight months of 2026 to £13.8 billion.

Monthly net retail fund flows have been positive ever since October 2025, which saw £4.6 billion in outflows.

Which asset classes were the most popular in August?

While investors were net buyers of funds in general during August, though, there were significant differences between funds targeting different asset classes.

Fixed income and mixed asset funds were the most sought-after, registering inflows of £656 million and £749 million respectively.

Equity funds, though, saw £478 million in outflows during the month. While that sounds like bad news for the stock market, it actually represents a substantial slowing of outflows compared to July, when nearly £2 billion of capital flowed out of equity funds.

^{Source: The Investment Association}

Money market funds saw net outflows of £728 million in August following three consecutive months of positive flows.

Which equity fund sectors saw the biggest outflows during August?

Equity funds across the board showed net outflows during August, and besides global funds – which registered net inflows of £568 million – no individual sector saw significant positive flows during the month.

However, the £459 million that left equity funds in August was an improvement following three consecutive months of £1.4 billion+ outflows (peaking at £1.86 billion outflows in June).

Funds investing in UK stocks saw the biggest outflows during August, with £615 million leaving this sector. Again, though, this was an improvement compared to July, when £1.65 billion left the sector.

Flows into North American funds turned negative, from £201 million inflows in July to £363 million outflows during August, while outflows from Asian funds accelerated from £49 million in July to £114 million in August.

There were modest positive inflows for funds targeting European and Japanese stocks, with these sectors netting inflows of £40 million and £25 million respectively.

Should you invest in funds?

Funds offer a versatile approach to investing across almost any type of asset class. They can work in a wide variety of market environments, as evidenced by the inflows and outflows across different sectors the August data reveals.

The IA noted that it is natural for uncertainty to creep into decisionmaking when it comes to buying funds.

“Market conditions alone do not determine investor behaviour,” said the IA’s Seath. “The domestic policy environment plays an equally critical role. With the Autumn Budget fast-approaching, it is worth remembering that policy stability is a fundamental pillar of investor confidence.

“In October 2025, the last full month before the previous Budget, UK retail investors withdrew £4.5 billion from investments, including £1.4 billion from UK equities, amid concerns about reported tax changes,” she added.

If you are new to investing in funds, it is worth considering that some funds are better for beginners than others. You should do your research thoroughly and consider where any given fund fits with your overall goals and risk tolerance before diving in.

MoneyWeek has always been a strong supporter of investment trusts, largely because they offer their managers freedom to take a longer-term view when constructing their portfolios. Other characteristics such as the ability to use gearing (borrowed money) or the chance for investors to buy at a discount to the value of their assets can help to improve returns, but it’s their “permanent capital” that is most valuable.

If you are investing directly into sectors such as property, infrastructure and private equity – where you can’t simply sell assets in a few days because your investors suddenly want their money back – the need for permanent capital speaks for itself.

However, even with listed investments, sectors such as smaller companies often suffer from high volatility and limits on how quickly you can buy and sell holdings. No high-conviction investor wants to be at the mercy of rapid inflows and outflows, so investment trusts are a natural structure for such portfolios. And in today’s short-term markets – where sentiment hinges on quarterly results, monthly data and what feels like daily geopolitical upheavals – there’s much to be said for a structure that encourages a long view, whatever you are investing in.

Investment trusts have been around since 1868, with all the ups and downs that implies; they can surely help investors navigate this age of rapid change as well. That said, the past few years have been difficult. Discounts soared, bringing pressure both from opportunistic activists and disgruntled shareholders. This was partly due to external factors, but it’s fair to say the sector was due a shake-up. Some boards had been too complacent. There was a clear need for consolidation. The failure to reach new investors was becoming critical.

Thankfully the outlook is now improving, and we hope this special supplement makes clear why the diversity of investment trusts to choose from should ensure a bright future.

~ Cris Sholto Heaton

What to do with a dud investment trust is a dilemma that we all face, and there is no easy answer. Sell and risk a dramatic recovery? Hold on and see poor performance continue? Double down and risk throwing good money after bad? Reduce and wish you had sold all?

Patience can pay off. Scottish Mortgage (LSE: SMT) went from the top of the table to the bottom, but is now at the top again over three years. Conversely, European Opportunities was the star of its sector but never recovered from the collapse of Wirecard, its largest investment, in 2020. It has since merged away.

If poor performance is the result of a sector, style or geography being out of favour, then a trust is usually worth sticking with. However, poor performance when there is no excuse, the manager has been inflexible or an investment thesis was flawed should be a reason to sell.

Can dud investment trusts be turned around?

So which are the dud investment trusts now? In the global sector, Mid Wynd (LSE: MWY) – once a MoneyWeek favourite – moved from Artemis to Lazard three years ago. The subsequent performance of just 17% against 63% for the MSCI World index has been dreadful. Surely the board will move it again?

STS Global Income and Growth (LSE: STS), run by Troy, has returned only 16%. It excuses this under an avowedly defensive strategy, which has been wrong. Troy's wealth-preservation-focused Personal Assets (LSE: PNL) has performed little better, as have Ruffer (LSE: RICA) and Capital Gearing (LSE: CGT). Maybe the Great Bear Market is just around the corner but they have been waiting for it for years. They have made no secret of their bearishness so their investors are presumably happy with their strategy.

AVI Global (LSE: AGT) has also lagged (36% over three years), but this is a firmly value-orientated trust in a market that favours growth. It could easily return to the top of the table, especially if the 20% allocation to Korea – made on the strength of corporate reforms that mirror those in Japan – pays off spectacularly.

A bigger question mark hangs over Alliance Witan (LSE: ALW), up 38% over three years. It has selected 11 “elite” managers from around the world with “distinct but complementary” investment styles, each investing in “no more than 20 high conviction stocks”. The returns suggest this approach isn't working. Investors should think about switching to F&C (LSE: FCIT), which up 60%, or Monks (LSE: MNKS).

The income orientation of Scottish American (LSE: SAIN) – widely known as SAINTS – hardly fits the Baillie Gifford investment style, so its dismal performance (up 25% in three years) should not be a surprise. It boasts 52 consecutive years of dividend increases, all paid from income, but its shares still yield below 3%. It has missed strong recoveries in banking, oil and gas, and utilities, as these companies “have not much control” over their fortunes. Murray International (LSE: MYI), Invesco Global Equity Income (LSE: IGET) and JP Morgan Global Growth & Income (LSE: JGGI) have far out-performed it.

Give Nick Train the benefit of the doubt

In the oversupplied UK sectors, Finsbury Growth & Income (LSE: FGT) has dismal returns over three and five years, up just 6%, but it was a star performer for many years previously. Manager Nick Train has evolved but not changed his investment approach and tells a compelling story about the opportunities he sees. He deserves the benefit of the doubt.

BlackRock Smaller Companies (LSE: BRSC) has gone from near the top of the UK small-cap table to near the bottom in the last five years, while CT UK Capital & Income (LSE: CTUK) lags way behind the All-Share index over all time periods. There is no shortage of better UK trusts: take Murray Income (LSE: MUT), which has moved managers from Aberdeen to Artemis and is already showing improved performance.

In Europe, BlackRock Greater Europe (LSE: BRGE) is now the weakest performer over all time periods up to five years, though it performed very well in the 17 years from launch until then. The board is surely reading the Riot Act to BlackRock.

Pacific Assets (LSE: PAC), the laggard in Asia, is being absorbed by Schroder Asian Total Return (LSE: ATR). Yet Scottish Oriental (LSE: SST), formerly its sister trust, has an even worse record, although it was once a star performer. Aberdeen Asia Focus (LSE: AAS), which has returned 73% against SST's 8% over three years, is an obvious alternative.

Technology and resources trusts have been standout performers among sector specialists, although Herald (LSE: HRI) has been left way behind by focus on small caps. Those who supported the Battle Against Cancer Investment Trust (BACIT) and saw it change into Syncona (LSE: SYNC) – investing in biotech start-ups – will wonder if it is too late to sell, especially given the 35% discount. Probably not.

Pershing Square (LSE: PSH) has been dismal over one and three years but previous periods of poor performance have been followed by spectacular recoveries. The 33% discount to net asset value (NAV) is surely a severe embarrassment to founder Bill Ackman, so this might be one of those rare examples of poor returns providing an opportunity to add to holdings rather than a reason to sell.

Get free tickets for the AIC Company Showcase

The Association of Investment Companies (AIC) will host its annual Investment Company Showcase on Friday 9 October in London. The event – now in its fifth year – is an excellent opportunity to gain insights into more than 30 investment trusts covering regions including the UK, Europe, Japan, India and emerging markets, as well as sectors including real estate and infrastructure. Attendees will also get the chance to put questions to many of the managers in the exhibition area, meet hundreds of fellow investors and probably run into some MoneyWeek contributors. Presentations will be livestreamed for those unable to make it to London. Book tickets and use the code MW26 for free entry.

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.

It has been a challenging few years for investment trusts. Rising interest rates, cost-disclosure problems and the dominance of markets by large US tech firms led to wide discounts and the re-emergence of activist shareholders. Yet there is now a series of signals that indicate there is light at the end of the tunnel.

Discounts are narrowing. Fundraising is picking up. A solution to the cost-disclosure issue is in place. There are proposals to address loopholes exposed by activists. Investment trusts have been included in the Pensions Scheme Bill, and more marketing to increase awareness of investing and investment trusts is on its way.

Discounts rose from 2.5% at the end of December 2021 to a peak of 18.8% at the end of October 2023. Since then, discounts have narrowed to 11% at the end of July. The sector has radically reshaped itself with unprecedented levels of mergers and share buybacks, as well as mandate changes and fee cuts. Boards have worked hard to give shareholders a better deal.

Fundraising is also starting to come back. In the first half of the year, Seraphim Space Investment Trust raised £137 million, while TwentyFour Income Fund and Invesco Bond Income Plus raised £98 million and £85 million respectively.

Cost-disclosure rules had artificially made investment trusts look expensive, which deterred wealth managers from buying them. This has now changed, with the unique characteristics of investment trusts being recognised by the Financial Conduct Authority (FCA) in its new cost disclosure regime. Other funds no longer have to pull through the costs of investment trusts when investing in them. This positive outcome could well lead to more wealth managers and open-ended funds buying investment trusts next year.

Positives ahead for investment trusts

When discounts widened, activist investors became buyers. This is not unusual; activists have long been a feature of this industry. They usually aim to narrow discounts and secure an exit. So long as their objectives are shared by other shareholders, they are seen as a healthy feature of capital markets.

However, Saba Capital also had another agenda – in some cases it wanted to replace the board and become the investment trust’s manager. The FCA has now put forward proposals to strengthen investor protection and address this gap in the rules. This should prevent a substantial shareholder like Saba, who wants to manage the company, from seizing control of the board to promote its own interests at the expense of other shareholders.

Other positives include investment trusts’ inclusion in the new Pension Schemes Act. Pension schemes will now be able to use investment trusts to meet any requirement to invest in private assets. It’s very early days, but this could result in them investing more in investment trusts in sectors such as infrastructure, renewable energy, private companies and property.

Investment trusts are particularly suitable for these hard-to-sell assets. Since they are listed companies, investors buy and sell their shares on the stock market without altering the capital in the investment trust. Unlike open-ended funds, managers are not forced to sell holdings to meet redemptions, and this allows them to take a long-term view. This also enables investment trusts to give investors access to exciting private companies before they list, such as SpaceX and Anthropic.

The government-backed “Take The Next Step. Invest” campaign should also be helpful. This aims to persuade people with spare cash to start investing. The Association of Investment Companies (AIC) will launch a marketing campaign next year to increase awareness of investment trusts amongst millennials and Gen Z.

Most importantly, investment trusts’ performance over the long term remains strong. The average investment trust has returned 15%, 26% and 148% over one, five and ten years respectively to the end of July 2026. Performance also compares well with open-ended funds. Our “sister funds” research finds that where the same managers run similar investment trusts and open-ended funds, the investment trusts have beaten the sister fund over ten years in 77% of cases.

When it comes to income investing, investment trusts have special advantages. There are 20 “dividend hero” investment trusts that have raised their dividends every year for over 20 years. A trust can do this because it can retain up to 15% of its income, and this revenue reserve can be used to boost dividends when markets are tough. It can also offer an enhanced dividend by paying a percentage of its capital profits as income.

Attend the AIC Investment Company Showcase

To find out more about investment trusts, come to our flagship event, The Investment Company Showcase, on 9 October. You can attend in person at 133 Houndsditch in London or online. We have 30 investment trust managers presenting, including our keynote speaker Job Curtis, manager of City of London Investment Trust. This trust is approaching a record 60 years of dividend increases – an impressive record.

Managers are flying over from Japan and India to speak, covering a wide range of themes from emerging markets and the hunt for yield to property and infrastructure. Presentations include BlackRock World Mining, Monks, Mercantile, Invesco Bond Income Plus, Cordiant Digital Infrastructure and more.

The Showcase is free to register for private investors who use the special MoneyWeek code MW26. We look forward to seeing you there.

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.

The MoneyWeek portfolio of investment trusts was created in June 2012 as an easy-to-follow, set-and-forget, all-weather portfolio. Investment trusts were chosen on the grounds of their long-term performance, flexibility, cost, as well as other factors such as their ability to use gearing and for investors to trade in and out of positions with relative ease.

The initial six holdings were chosen to cover a range of different strategies, with the aim of changing them as infrequently as possible. Over the past 14 years, there have only been six changes, with two of the original trusts still in the portfolio today. Our changes have added value about 50% of the time; that is to say, around half of them ended up generating worse returns than staying put. This is a valuable example of the benefits of not tinkering too much.

Overall, the portfolio has returned a satisfactory 248% (9.2% per year) in share-price terms, assuming no rebalancing between holdings (which may not be entirely realistic). The FTSE UK All-Share index has returned 5.2% per year over the same time, while US-heavy FTSE All-World index has returned 9.7%. Dividends would have further topped up returns, although this is not an income portfolio – the average yield (weighting each trust equally) is around 2%.

How our investment trust portfolio looked at the beginning

The original trusts were picked with diversification in mind, with each falling in a different sub-sector of the investment trust universe. Personal Assets (LSE: PNL) – still in the portfolio today – was selected for its emphasis on absolute returns, wealth preservation and a zero-discount policy, which made it the perfect “core defensive holding”.

At the other end of the risk spectrum, Scottish Mortgage (LSE: SMT) was the key “growth equity” in the portfolio. After a long run of market-beating returns, the trust also remains a core holding of the current portfolio.

Finsbury Growth & Income (LSE: FGT) was initially picked in 2012 for its focus on high-quality global businesses and a “disregard for benchmark strictures”. Lead manager Nick Train had a strong record in 2012, having outperformed the FTSE All-Share Index over the previous ten years.

BH Macro (LSE: BHMG) invests all its assets into the Brevan Howard Master Fund, a global macro hedge fund that had outperformed during the turbulent years of the 2008-2009 financial crisis. The thinking here was to include a trust whose “fortunes tend to be inversely correlated with the equity markets”.

3i Infrastructure (LSE: 3IN) was added as an “absolute return income-generating pick”. The trust was selected over some sector peers for its preference on “operating assets rather than contracts whose values will fall over time”.

Finally, RIT Capital Partners (LSE: RCP), chaired at the time by Jacob Rothschild, was “an old industry favourite”. It offered a diverse portfolio of public, private, hedge fund and real assets.

Changes to the investment trust portfolio

The first change came in a little over a year, when Caledonia Investments (LSE: CLDN) replaced BH Macro. In hindsight, BH Macro may have been a weak choice in the first place. Yes, it gave investors access to a type of investing that’s usually off-limits to those with less than £1 million of assets. However, hedge funds are expensive (BH Macro’s charges vary between 1.5% and 2% per annum depending on performance fees), and returns at the time did not justify that.

Caledonia is a family investment company, with a diversified, global portfolio and long-term outlook. It was added to the portfolio at a 20% discount to NAV. This is one of the trades that’s worked best. Since the portfolio was first constructed, BH Macro has returned 114% to the end of July 2026. By switching to Caledonia, the portfolio has earned a 124% return.

Late 2015 and early 2017 brought two more changes: the removal of 3i Infrastructure, replaced by Law Debenture (LSE: LWDB), followed by the sale of Finsbury Growth & Income for Temple Bar (LSE: TMPL). 3i Infrastructure was sold after management reset its target return objectives. Finsbury Growth was removed on valuation grounds – after gaining 98% in five years, the underlying holdings appeared expensive compared with the rest of the market.

Both Law Debenture and Temple Bar were selected for their low costs and contrarian, UK-focused value strategies. Law Debenture was trading at a 14% discount to NAV – a discount that has now all but disappeared. This turned out to be an astute decision: 3i Infrastructure’s share price has returned 118% over the 14 years, versus the 200% achieved by switching.

The Temple Bar position worked out less well. This holding was sold in May 2020 (at a loss of 42%) and replaced with Mid Wynd International (LSE: MWY) following the severe underperformance of UK value stocks (partly due to the effect of the pandemic) and the departure of manager Alastair Mundy. This meant the portfolio did not benefit from its strong recent returns under Ian Lance of Redwheel.

Mid Wynd was added as a “resilient, quality-growth global compounder to balance Scottish Mortgage” but failed to live up to expectations. It was removed in April 2025, after a change in management, and replaced by JPMorgan Global Growth & Income (LSE: JGGI). The inability to stick with one trust for this part of the portfolio has hurt returns. Switching from Finsbury to Temple Bar to Mid Wynd and finally JGGI produced a return of 65% to the end of July.

In comparison, even though Finsbury has drastically underperformed over the past five years, it has returned 142% since June 2012. Switching from Finsbury to Temple Bar and then sticking with that would have been an even better decision, with a return of 236%.

The final major change in the portfolio was the sale of RIT for AVI Global (LSE: AGT) in March 2023. RIT’s exposure to private equity and venture capital had increased from 24% in 2012 to 45%, which didn’t sit so well with the rest of the portfolio. Meanwhile, AVI’s “global value remit, exposure to family holding companies, discounted trusts, and Japanese equities” seemed attractive in comparison to the wider valuation of global markets. So far, the returns from both RIT and AVI have been fairly similar.

What could the investment trust portfolio look like in the future?

So what could the next 14 years hold for the portfolio? Are the six trusts still the right ones for today’s markets? What other trusts might work in a similar strategy?

Personal Assets is one of the best ultra-defensive plays around, helped recently by its exposure to gold. Its closest peers are Capital Gearing Trust (LSE: CGT) and Ruffer (LSE: RICA), both of which follow similar strategies to protect and grow capital in excess of inflation over the long term. The inflation spike in 2021-2023 and the timing of how markets adjusted to interest-rate hikes mean that Personal Assets’ returns over the last five years are lagging inflation. However, it is still ahead over ten years and back ahead over three.

While JGGI has hardly blown the lights out since it was added to the portfolio, previous trading suggests it would be a mistake to tinker further with this holding. This is the largest trust in the global equity income sector, with the best record and highest dividend yield (3.9%). It pays dividends out of both income and capital growth, with a target of 4% of NAV out every year. While in theory this means the payout could fall, management has so far avoided this by being overweight growth stocks. The approach gives it more flexibility than peers such as Murray International (LSE: MYI) or Scottish American (LSE: SAIN).

Law Debenture has by far the best record of any UK equity income trust over the past ten years, with a performance gap of around 100% over closest rival Temple Bar (although the latter has done well lately under its new manager). That’s partly because it is both an investment portfolio and a professional services business. The latter arm carries out mundane but essential tasks such as pension-scheme management, escrow services and paperwork for issuing corporate bonds. Income from this has generally met about a third of the trust’s annual cash dividend requirement.

That gives the managers flexibility to invest in both income and non-income-producing equities (ie, growth stocks). The approach is clearly working, but for investors who prefer a straightforward UK equity fund, there are many peers with a range of styles: Temple Bar, Aberdeen Equity Income (LSE: AEI), City of London (LSE: CTY), Edinburgh (LSE: EDIN), Fidelity Special Values (LSE: FSV), Merchants (LSE: MRCH) and Murray Income (LSE: MUT) to name a few. Note that Lowland (LSE: LWI) is run by Laura Foll and James Henderson, who look after Law Deb’s investments.

Caledonia’s shares have lagged the market over the last five years as its discount to NAV has remained stubbornly high, averaging 30% to 40%. The trust has tried to remedy this by splitting the stock to improve liquidity, buying back shares and pushing the dividend higher, but the big block of stock (48%) owned by the Cayzer shipping family clearly weighs on it. Still, we bought Caledonia as a family-controlled trust, liking it due to its mixed exposure to private equity funds, direct private company holdings and public equities. It is still one of the best in the space for this combination. The higher weight to direct investments still gives it the nod over its main peer RIT for our purposes.

Scottish Mortgage has been the portfolio’s biggest winner by far, with a return of 940% since 2012. The trust’s edge has been its ability to pick winners and act with conviction, something no other trust has managed to replicate with success across private and public markets. Yes, there has been some volatility along the way, as any shareholders who held through the 2021- 2023 peak-to-trough decline of nearly 56% will attest. However, the rewards from this style of investing don’t come without risks.

Finally, AVI Global. The reasons for adding this trust still stand. Its focus on value is highly attractive in what one might argue is a frothy market, and it offers significant exposure to Japan (23%). With look-through exposure to the US of just 13%, the fund has missed out on some of the recent tech boom, but it is intended to offer something very different to the global index. Peers Alliance Witan (LSE: ALW), Brunner (LSE: BUT), F&C (LSE: FCIT), and Monks (LSE: MNKS) may be simpler options for a one-stop global trust, but AVI’s blend of global value and activism remains attractive as a complement to the rest of our portfolio.

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Investment trusts are one of three main types of funds, with the other two being exchange-traded funds (ETFs) and what are variously called open-ended investment companies (OEICs) or unit trusts (depending on their exact structure). Each of these has advantages and disadvantages. To see why, let's look at how they work and where investment trusts win out.

Investment trusts are closed-ended, which means that they have a fixed amount of shares. They are listed on the stock market, so when you invest, you buy the shares from another investor who wants to sell (via your broker). If you want to cash out, you sell to another investor who wants to buy. These trades do not affect the money within the trust.

OEICs are open-ended and are not listed on a stock exchange. If you want to invest, you send your money to the fund manager (via your broker) and more shares are created for you. If you redeem, the manager cancels your shares and sends you the cash. Each of these trades changes the amount of money held in the fund.

ETFs are listed on the stock market, but are open-ended. This may not be obvious to you, since you will trade one in the same way as an investment trust. However, institutional investors, known as authorised participants, also trade directly with the manager to create and redeem shares. When they do this, money flows in or out of the fund.

Investment trusts have a permanent capital structure

One strength of an investment trust is that buying and selling shares has no effect on its portfolio, because the manager does not need to invest fresh cash or sell assets to fund redemptions. Having this permanent capital is important for investing in assets that can't be sold quickly – infrastructure, private equity, real estate or small caps – or certain long-term investment strategies. On the other hand, the price that investors pay or receive for shares in a trust is the prevailing market price. This can be at a discount or a premium to the trust's underlying net asset value (NAV) – the value of its assets minus its liabilities. There is no automatic mechanism for keeping them in line.

Conversely, an OEIC always trades at NAV, while the price of an ETF should also be very close to NAV because the authorised participants will quickly trade away any discount or premium. This makes them good for tracking an index or investing in liquid assets. You should be able to cash out your holding at full market value at any time.

Investment trusts help create long-term value

So ETFs and OEICs are simpler – but investment trusts offer more ways to boost returns. For example, if you buy a trust's shares at a discount to NAV, this will amplify your gains if the discount shrinks on top of the underlying investment return. An unusually wide discount should reduce over time if performance is good, although this is not guaranteed. A trust can use share buybacks or tender offers to try to raise the price and close the discount faster, but this won't always work. Sometimes discounts can last longer than expected because of weak demand among investors for a certain sector or style, or even investment trusts as a whole. Still, when a trust buys back shares at below their fundamental value, that should create value for its remaining investors over the long term.

And the long term is what trusts are about. A trust is a listed company whose role is to make investments. The investors are shareholders, with a board to look after their interests, and an external manager to run the portfolio. They have options that open-ended funds don't have. They can borrow to buy extra assets up to a limit set by the board (often 20%). This gearing has the potential to increase returns, although it can also amplify losses. They can hold back some income to keep dividends steady. If returns are poor, they can replace the manager. And if weak performance or a wide discount persists, shareholders may vote to sell some assets and take back some capital, or wind up altogether. In short, it is a very different relationship with investors compared to OEICs – and, in MoneyWeek's view, a solid basis for building wealth.

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Diversification is often said to be ‘the only free lunch’ when it comes to investing, and funds are perhaps the simplest way to achieve this.

Any investment fund represents a bundle of stocks, adding instant diversification to your portfolio. So, does it follow that more funds means more diversification and better returns, or is there a limit to how many funds it is sensible to hold?

“The key is to build a diversified portfolio because this helps you weather different market conditions,” said Clare Francis, savings and investments director, Barclays Private Bank and Wealth Management. “Diversification means spreading your money so it’s invested globally, giving you exposure to different countries and sectors, with a mix of shares and bonds.”

This can be achieved, Francis added, by using a single fund, which some platforms offer as ‘ready-made’ options.

“They invest in a mixture of bonds, shares and cash and they invest globally,” she explained. “The way they differ is the level of risk each fund takes, so all you need to do is pick a fund that best suits the level of risk you feel comfortable with.”

But it sometimes makes sense to hold more than one fund or investment trust in your portfolio. What are the benefits, and what is the ideal number of funds to hold?

Why might you want to hold more funds?

If you are a beginner investor, it can make sense to start out small and diversify your fund holdings from there.

“We see many investors start with a ready-made fund and add additional funds, or even buy shares in individual companies, once they get more confident,” said Francis. “If you don’t want to go down the ready-made route you can create a diversified portfolio yourself by buying individual funds that each invest in a different part of the market such as the UK, US, Europe, Asia and emerging markets.”

Some funds are more suitable for beginners just starting to build their portfolio. If you feel less confident, keep it simple to begin with – there is very little to be gained from adding a fund that you don’t understand to your portfolio when there are ready-made options out there that can take a lot of the decision-making off your plate.

Once you are more confident, you might want to add more funds to your portfolio in order to gain exposure to specific investment themes or sectors.

“If you prefer to build your own diversified portfolio, around 10 well selected funds can be more than sufficient to provide diversification across different asset classes, regions, market capitalisation and styles,” said Dzmitry Lipski, head of funds research at investing platform Interactive Investor.

The disadvantages of holding more funds

Adding more funds to your portfolio doesn’t necessarily mean you’re increasing your level of diversification.

“Holding too many funds can create unnecessary complexity and may result in investors owning overlapping investments without realising it,” said Barclays’ Francis.

Realistically, the more funds you hold, the less each is going to contribute to your overall returns.

“If you hold more than 20 funds, it is probably worth reviewing whether each one has a clear role and is genuinely adding something different to the portfolio,” said ii’s Lipski. “Too many funds can make a portfolio unnecessarily complicated and harder to monitor and rebalance.”

The more funds you hold, the higher the likelihood that several of them are duplicating exposure to the same stocks or assets – so holding more funds, beyond a certain level, doesn’t necessarily mean greater diversification.

“Rather than focusing purely on the number of funds, investors should ask what role each holding plays and whether it adds something genuinely different,” said Lipski.

Does the size of your portfolio impact the number of funds you should hold?

There’s no real reason why the size of your portfolio should dictate the number of funds you hold. Regardless of size, your portfolio is likely to be allocated based on percentages of the total. Your risk appetite and other factors will dictate what percentage of the whole you allocate to different sectors and asset classes.

“The size of the portfolio matters less than its overall asset allocation and the role of each fund. A large portfolio does not automatically need more funds,” said Lipski. “Someone with a relatively small portfolio can obtain broad diversification through one multi asset fund, while investors who want greater control over their asset allocation may choose several funds.

“If a fund represents less than around 2% of your portfolio, it is worth asking whether it is large enough to make a meaningful difference to overall returns or risk,” he added. “There may be good reasons for a small specialist allocation, but very small holdings can otherwise add complexity without materially changing the portfolio.”

Caledonia Investments (LSE: CLDN) is one of the market's more esoteric investment trusts. Founded by the wealthy Cayzer family, which once owned one of the world's most powerful shipping conglomerates, the £3.1 billion fund now functions as a multi-asset growth and protection vehicle.

Caledonia has been part of the MoneyWeek investment trust portfolio since 2013. We like its diverse approach and its aim of earning solid long-term returns of 3%-6% above inflation, while managing risk during periods of uncertainty and instability. The Cayzers own 51% of the trust, putting it under the stewardship of a powerful long-term shareholder.

However, while the trust has undoubtedly achieved its performance target over the past three, five and ten years, its recent record still leaves something to be desired with regard to its share price, which languishes on a 35% discount to net asset value (NAV).

Three-way split in Caledonia's portfolio

Caledonia's portfolio is split into three roughly equal pools: quoted equity, private equity funds and private capital. At 25% of net asset value, the private capital pool is the smallest of these three segments. This portfolio comprises ten high-quality UK mid-market businesses with “prudent capital structures”. The largest holding here – and in the portfolio overall – is AIR-serv Europe. This firm designs, manufactures, and maintains forecourt equipment like air, vacuum and jet wash machines. Since being acquired in 2023, its value has grown from £143 million to £215 million as of the end of August. Last year, the company paid Caledonia a £24.5 million dividend.

These types of holdings give the trust an edge over other wealth protection vehicles. Other trusts in the sector usually rely on third-party funds, equities and alternative investments, Caledonia has direct control over these holdings and is not subject to additional fees. It can also buy and sell when it sees fit – if an asset such as AIR-serv is working well, there's no need to sell. Other private capital holdings include hospitality operator Butcombe (4.1% of NAV or £127 million) and garden centre operator Blue Diamond (1.9% of NAV or £60 million). The latest addition is a 61% stake in Conquip Engineering.

Listed equities are 32% of NAV at present. This pool comprises around 30 equity holdings, including tobacco giant Philip Morris (2.9% of NAV or £91 million), Texas Instruments and Microsoft.

Finally, there's the private equity fund pool. At 32% of NAV, this is equal to the direct private holdings, but with holdings in 80 funds across 45 private equity managers, there's more diversification. Caledonia says it's often the only European investor in these vehicles, which are predominantly focused on buy-out deals in the North American mid-market segment.

Caledonia's stubborn discount

Aside from the goal of beating inflation by 3%-6%, Caledonia also uses the FTSE All-Share Total Return index as a benchmark for its performance. Over the past decade, the trust's NAV has beaten the consumer price index including housing (CPIH) by a factor of three times and matched the FTSE All-Share.

However, both NAV and share price have trailed the FTSE All-Share over three and five years, while the share price over five years has fallen short of its inflation-plus target. Management has tried a share split to improve liquidity and has been buying back stock to unlock value. Since 1 April, it has spent £30.6 million buying shares at an average discount of 37%. This has boosted NAV by 3.5p per share, but the discount remains stubbornly wide. More work is needed here.

That said, Caledonia's edge lies in its diversification. In an ever-rising market, its strategy is always going to lag. The test will come in the next crash, when we see if it outperforms investors who increasingly seem besotted with the AI bubble.

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One of the biggest appeals of investment trusts is their ability to pay out dividends, even during tougher economic times.

However, some investment trusts are better than others at consistently increasing the amount they return to their shareholders.

The Association of Investment Companies (AIC), an industry body representing investment trusts, tracks so-called ‘dividend heroes’ – investment trusts which have raised dividends for at least 20 consecutive years.

Annabel Brodie-Smith, director at the AIC, said: “Investment trusts can achieve these impressive long records of dividend growth because they can smooth their flow of dividends.

“A trust can retain up to 15% of the income it receives each year, and this reserve of income can be used to boost dividends when markets are difficult.

“Dividends are never guaranteed, but these long records of resilient dividend growth are much appreciated by income investors.”

The investment trust dividend heroes with the longest dividend-raising streaks

The City of London Investment Trust (LON:CTY) topped the AIC’s list, having increased its dividend payout every year for the last 60 years. The trust invests in UK-listed equities, with top holdings as of 31 July including HSBC, Shell and NatWest.

The trust says its focus is on providing a steady income stream to customers in dividends as well as delivering long-term growth on investments.

“By reaching this milestone we celebrate not only 60 years of consecutive annual dividend increases, but also the resilience of the UK market and indeed the benefits afforded to us by the investment trust structure,” said Job Curtis, fund manager at the investment trust.

“Our investment approach prioritises patience, valuation discipline and long-term thinking, all of which has allowed us to navigate the varied market conditions of the past six decades.”

Three investment trusts could join City of London in the 60+ threshold next year, having been consistently raising dividends for the last 59 years: Bankers Investment Trust (LON:BNKR), Alliance Witan (LON:ALW) and Caledonia Investments (LON:CLDN).

Bankers Investment Trust’s main focus is on holding a global portfolio of stocks selected for their potential to grow and generate increasing income over time.

Its largest holdings as of 31 August are in chip designer Nvidia, cloud and e-commerce giant Amazon and chipmaker Taiwan Semiconductor Manufacturing: holdings also include American aerospace and defence firm RTX as well as Japan Post Bank.

Alliance Witan is run by 11 fund managers who pick high-conviction stocks from around the world with the goal of delivering long-term returns through capital growth and a rising dividend.

Top holdings as of 31 July are Microsoft, Alphabet and Taiwan Semiconductor, alongside smaller holdings in drinks firm Diageo and Samsung Electronics.

Caledonia invests in public and private companies across the globe, but mostly in North American, UK and Asian-listed stocks, including family services company Stonehage Fleming and investment company Cobepa.

Which investment trust became a dividend hero in 2026?

BlackRock Greater Europe (LON:BRGE) became a dividend hero in May, when it reached its twentieth consecutive year of increased dividends.

The investment trust invests in equities across more than a dozen European countries, with 22.5% based in the Netherlands, 16% in France and more than 16% in Switzerland.

Stocks are held across a range of sectors such as technology, energy and healthcare. The trust has a dividend yield of 1.22% and has grown its dividend at an annualised rate of 3.06% over the last five years as of 11 September, according to Morningstar data.

Andrew Impey, chair of BlackRock Greater Europe Investment Trust, said: “We are pleased to have delivered 20 consecutive years of dividend growth to our shareholders, reflecting the resilience of BlackRock Greater Europe’s underlying portfolio holdings through different market cycles.

“This resilience is underpinned by BlackRock’s highly regarded and well-resourced European team, which seeks to identify the best investment opportunities across Europe, focusing on companies with durable competitive advantages and quality management teams committed to long-term value creation.”

Source: theaic.co.uk / Morningstar, as of 11 September, 2026

For listed private equity funds, discounts to net asset value (NAV) widened sharply when bond yields rose in 2022. Investors were anticipating that the valuations of private equity investments would follow share prices down after the customary lag.

Boards responded with share buyback programmes in an attempt to add value and close the discounts. Yet discounts remained stubbornly high as valuations stagnated.

When markets started to move higher two years ago, investors could reasonably have expected private equity fund valuations to follow. This should have led to a fall in discounts, regardless of buybacks. Yet the evidence for this is mixed.

Diverging fortunes for private equity funds

Pantheon International (LSE: PIN) and HarbourVest Global Private Equity (LSE: HVPE) have returned almost 20% in one year, while Patria Private Equity (LSE: PPET) is up over 50% in three. All had significant help from narrowing discounts. However, 3i (LSE: III) has lost 25% and HgCapital Trust (LSE: HGT) almost 15%, as their discounts have headed in the wrong direction.

What is going on? The answer is that 3i and HGT are special cases. 3i traded on a large premium thanks to the phenomenal performance of discount retailer Action, which had come to account for over three quarters of its NAV. When Action's growth appeared to falter, that led to a slump in 3i's share price. The £28 billion trust now trades on a 7% discount, up from 30% a few months ago.

3i's update at its annual general meeting in June showed that pessimism about Action had been overdone. Performance in the rest of the portfolio is steady, but accounts for less than a quarter of the total. So despite 3i's shares being much better value than they were a year ago, they are still very much a bet on one company.

HGT specialises in the software sector and so it has suffered from fear that its holdings will be disrupted by AI. This fear may prove exaggerated, but has led to a justifiable fall in the share price even though underlying performance has been good. In its June update, it reported growth in revenue and cash generation of 16% and 19%, respectively, as well as £134 million of realisation proceeds in the first half at an average uplift to carrying value of 31%.

However, it has continued to reduce valuations and its portfolio is now valued at a weighted average multiple of 23 times cash generation. This still looks rich, especially as the portfolio carries plenty of debt, but is more than offset by the shares trading at a 23% discount. The shares have recovered from their May low, but the rally should go further.

The price of Oakley Capital (LSE: OCI) has also recovered, but it still sits on a discount of 33%, despite reporting a gain of 6% in NAV in the first half. Literacy Capital (LSE: BOOK) was a sector darling until two years ago, since when its shares have slid 40% to a 37% discount. The NAV has fallen 7% over the last year and is up just 3% over three, but an upturn is surely imminent. Both shares look a bargain.

Time to boost demand for private equity funds

Meanwhile, the funds of funds such as HarbourVest, Pantheon, Patria, ICG Enterprise (LSE: ICGT) and CT Private Equity (LSE: CTPE) – which invest in the funds of other managers or co-invest in companies alongside them – all trade on discounts of 25%-30%. Their boards continue to be obsessed with share buybacks to reduce the discount, but they need to focus more on increasing the demand for their shares than reducing the supply.

Investors are hungry to see evidence of hidden gems in private equity fund portfolios that can grow much larger over time. Action was once just a modest holding for 3i. Boards need to move onto the front foot in extolling their holdings. Yet investors shouldn't wait for them to do so, or they will end up paying much higher prices.

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When geopolitical shocks occur, like the conflict in Iran that has shaken markets since late February, knowing where to put your money to protect your wealth is key.

The Association of Investment Companies (AIC), an industry body representing the UK’s investment trusts, has identified the closed-ended funds that have shown the greatest resilience during the conflict’s duration.

Technology-focused investment trusts have led the way, with the continued demand for artificial intelligence (AI) stocks and funds lifting the sector in spite of global turbulence.

“Investment trusts in the technology sector have continued to power ahead as the AI investment boom goes on,” said Annabel Brodie-Smith, director of the AIC. “And the growth capital sector has thrived due to its big holdings in fast-growing private companies and potential IPOs such as Anthropic, ByteDance and Revolut.”

So which investment trust sectors proved the most resilient – and which ones have delivered the greatest returns for shareholders over the course of the conflict?

The investment trust sectors that have been most resilient

It wasn’t all about tech and growth sectors. Some of the other top-performing investment trusts since the start of the Iran conflict have come from less obvious sectors – particularly renewable energy.

^{Source: theaic.co.uk / Morningstar. Share price total return in % from 02/03/2026 to 31/08/2026. Excludes VCTs. See AIC sector definitions.}

“Shares across the [renewable energy infrastructure] sector have bounced as investors have warmed to renewable energy during a war that has exposed the weaknesses of our oil and gas supply chains,” said the AIC’s Brodie-Smith.

Commenting on the outperformance of the renewable energy infrastructure sector, Charlie Wright, co-lead investment manager of Foresight Environmental Infrastructure (LON:FGEN), said “Iran conflict has perhaps prompted investors to reassess the strategic value of renewables and environmental infrastructure, reminding investors that an overreliance on volatile imported fuels is not a wise position to take.”

Which investment trust sectors have outperformed since the start of the Iran war?

Foresight Environmental Infrastructure was one of two renewable energy infrastructure investment trusts to make the top-five in terms of share price total return since the start of the Iran conflict.

Growth capital trust Molten Ventures (LON:GROW), which holds stakes in Revolut and Finnish space economy start-up ICEYE, took the top spot, while the Biotech Growth Trust (LON:BIOG) took second and Allianz Technology Trust (LON:ATT) came third.

^{Source: theaic.co.uk / Morningstar. Share price total return in % from 02/03/2026 to 31/08/2026. Excludes VCTs and trusts in liquidation.}

Stephen Packwood, co-manager of Greencoat UK Wind (LON:UKW) said “investor interest in renewables has picked up since the start of the war given security of supply and cost of energy concerns” but that the trust’s “strong performance in terms of power and net cash generation” had been the main driver behind its outperformance, covering its dividend payout in the first six months of 2026 and providing further capital to grow the business.

“Renewables, in particular wind, are well placed to take advantage of the forecasted increase in electricity demand over the coming years,” he added.

Law Debenture (LSE:LWDB) is a unique investment trust. It is part equity income portfolio and part professional services company, all in one high-performing £1.7 billion wrapper.

It has been a stalwart of the MoneyWeek Investment Trust portfolio since September 2015, with the second-best performance of all the trusts selected. Over the past ten years the shares have produced a total return of 263%, versus 130% for the FTSE All-Share index. It has also outperformed its benchmark by a wide margin over one, three and five years.

This performance is by far and away the best of any trust in the UK equity income sector. The secret of its success is down to the independent professional services (IPS) business.

The success of Law Debenture’s IPS

The IPS business provides a selection of relatively mundane, but essential services focused around three groups: pension services, which provides pension trust services across the UK; corporate trust, a provider of trust and escrow services for transactions such as bonds and mergers and acquisitions (M&A); and corporate services, which provides company secretarial and entity management services.

Inflation-linked organic growth has been complemented by acquisitions – most recently the purchase of company secretarial unit Konexo in 2024 – have all helped IPS grow both top and bottom lines.

These businesses grew net revenue by 6% in the first half of 2026 – the ninth consecutive year of mid-to high-single-digit growth.

These businesses are relatively specialist, so they are difficult for customers to do in-house. They are also low-margin and only profitable at scale, giving incumbent providers a significant edge.

There are only a handful of peers: the four public comparables include London-listed JTC, which is in the process of going private.

Dividend support

IPS accounts for only 15% of Law Debenture's net asset value (NAV), but over the years, its profits have helped support around a third of the trust's dividend distributions to investors.

That gives James Henderson and Laura Foll, the managers of its equity portfolio, a huge advantage for their strategy.

While other UK equity income trusts need to prioritise owning dividend-paying shares to support their distributions, they can take a more flexible approach.

For example, in February 2020, Law Debenture built a position in Rolls-Royce, which then had to suspend its dividend during the pandemic. Other income trusts might have been forced to sell, but Henderson and Foll held on. The position has since generated a return of more than 1,100%.

Other examples include Marks & Spencer and Babcock. Both of these have been held for capital gains, despite their poor dividend credentials.

A strong first half

The portfolio – which accounts for 85% of NAV – is built around growth, income and value. There is also a higher percentage of smaller and medium-sized companies than you might usually find in a UK equity income trust, which reflects the solid foundation provided by IPS.

For example, in the first half, positive contributors in the investment portfolio included companies viewed as beneficiaries of AI, such as Ceres Power and Infineon Technologies. Henderson and Foll also added positions in LSEG and Relx, two previous winners that had sold off due to concerns about the threat of AI.

Strong performers during the period included Beazley, Senior, International Personal Finance, Schroders and Tate & Lyle – all of which received takeover offers, which is “further evidence of the valuation opportunity available in UK equities”, say the managers.

The trust's own shares have also been trading well. For the six months to the end of June, they produced a total return of 16.2%, as they moved from a 2.5% discount to a 1.7% premium on top of the underlying NAV return.

The quarterly dividend was increased by 6% to 8.875p. Based on the company's current target for the year, the shares currently yield around 2.9%.

Henderson is set to retire in June next year, with Foll taking over the portfolio as lead manager. Given her ten years' experience at Law Debenture – as well as 12 on the Global Equity Income team at Janus Henderson – it should be business as usual when she assumes sole command.

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.

Putting money in the S&P 500 is popular among those who want to start investing as well as experienced investors.

The S&P 500 is an index that tracks the performance of 500 of the largest companies in the United States, and is therefore one of the most effective proxies for the US stock market.

If you put your money in the index, you are effectively backing large US companies to continue to perform and grow in the future. Historically, this has brought about large returns.

Between 1 January 2000 and 1 January 2026, the S&P 500 increased by around 386%, and in the year to 17 August 2026 alone, the index rose by around 20%.

Given the index’s historically strong performance, it’s a popular one for people to track – often using an exchange-traded fund (ETF).

ETFs are one of the “the simplest ways to start investing,” says Kate Marshall, investment analyst at Hargreaves Lansdown.

“They can offer a great entry point into investing because they provide exposure to a diversified mix of investments, such as shares or bonds, rather than relying on the fortunes of a single company or asset. This helps to spread risk and can smooth some of the ups and downs that come with investing.”

But with so many options, how do you choose the one that’s right for you?

What are the most popular ETFs that track the S&P 500?

The most popular S&P 500 ETF is the Vanguard S&P 500 UCITS ETF USD ACC (GBP), according to Hargreaves Lansdown.

That title has several components, each of which says something about the ETF:

• Vanguard is the name of the company that issues the ETF and S&P 500 refers to the index the ETF tracks.
• UCITS stands for “Undertakings for Collective Investment in Transferable Securities”, a regulatory framework that governs how ETFs in the UK and European Union operate. It effectively means the fund can be sold to UK and European investors.
• USD refers to the base currency of the ETF – in this case US dollars. Some ETFs hedge against the possible impact of currency fluctuations between their holdings’ domestic currencies and another currency.
• ACC means the fund accumulates and reinvests dividends.
• (GBP) at the end refers to the trading currency of the fund. As this particular ETF is listed on the London Stock Exchange (LSE), you can buy and sell it in British pounds, meaning you do not need to manually convert currency.

This particular fund is listed on the London Stock Exchange (LSE) with the ticker “VUAG”.

The second-most popular ETF on Hargreaves Lansdown’s list is also from Vanguard – it is nearly identical to the one detailed above, but the only difference is that this one distributes your dividends. It trades on the LSE with the ticker “VUSA”.

A list of the top ten most popular S&P 500 ETFs among Hargreaves Lansdown’s investors can be found below.

^{Source: Hargreaves Lansdown, 31 July}

How much does an S&P 500 ETF cost?

When comparing S&P 500 ETFs, one of your biggest considerations should be the fund’s fees as they can eat into your returns.

The main one is the expense ratio, an annual fee charged by the fund provider for managing the fund. These are typically levied as a percentage of your holding in the fund.

For example, VUAG has an expense ratio of 0.07% which is relatively low. In contrast, HSBC's S&P 500 ETF has slightly higher fees of 0.09%.

That means that while both ETFs track the performance of the same basket of companies, you will pay higher fees with HSBC.

You should also look out for other types of general fees involved with investing, like platform fees. These are also usually levied as a percentage by the platform you use to make your investments.

Should I pick an accumulating or distributing ETF?

ETFs often have two variants: accumulating (ACC) or distributing (Dist).

The two labels refer to dividends – payments some companies make to investors – and what happens to them when they are paid out.

An accumulating ETF will automatically reinvest dividends back into the fund. This has the benefit of adding more money directly into your investments, meaning your position may grow faster.

Meanwhile, a distributing ETF will pay dividends into a bank account of your choice to do whatever you want with.

Which ETF to pick will depend on your priorities. Afolabi Thomas, equity specialist, Vanguard said: "Investors focused on long-term growth may prefer accumulation shares, while those looking for an income stream may prefer distribution shares."

One rule of thumb is the further you are away from retirement, the more likely an accumulation fund is right for you, as they allow your investments to grow faster.

“A distribution fund might suit someone who wants their investments to provide a regular income, which could become more relevant as they approach or enter retirement”, Lynn Hutchinson, head of ETF and Index Solutions at wealth manager Raymond James added.

“Though it doesn’t have to be a case of accumulation for younger investors and income for retirees. It really comes down to what you want the income to do. Someone in retirement could quite happily continue using accumulation funds and sell some of their investment when they need cash. Likewise, an investor who is still building their portfolio might prefer to receive the income”.

Why does performance differ between ETFs if they all track the S&P 500?

The performance of S&P 500 ETFs can vary slightly from one another.

This is known as tracking difference. Marshall explains: “Tracking difference shows how much an ETF has outperformed or underperformed its benchmark over a given period and is often the more important measure for investors, as it reflects the return they have actually received.”

There are many reasons an ETF may lag its benchmark, like fees, tax rates or securities lending (where the ETF issuer lends holdings out in exchange for a fee).

“Tracking difference gives you a broader view of what actually happened to the ETF's return once the various costs - and potential benefits - of running the ETF came into play,” said Hutchinson.

“That doesn't mean fees aren't important, they are. But when comparing two ETFs tracking the same index, looking at the OCF alone only tells part of the story. Looking at cost alongside historical tracking difference can give a much better idea of how efficiently an ETF has actually done its job: tracking the index.”

For all their talk of investing for the long run, active fund managers like to trade.

Take Terry Smith for example, whose flagship Fundsmith Equity fund reported portfolio turnover of 51.8% in the first half of 2026. In his mid-year letter to shareholders, Smith said the fund had started building positions in 12 companies while exiting, or starting to exit, 13 others. For a fund whose investment mantra ends with "do nothing", that's a lot of activity.

For investors in active funds, keeping tabs on what they own can be a challenge.

The latest Fundsmith Equity factsheet (31 July) lists only its top 10 holdings. It also says that, while a position is being built, the company name may be withheld until the intended weighting has been accumulated. That's a reasonable trading precaution, but another reason why monthly factsheets can be far from comprehensive.

A top 10 list is useful, but it's more like the signature dishes on a restaurant menu than an inventory of the kitchen. A fund can change materially beyond those 10 names, especially if several smaller positions are being added or sold.

While many funds only highlight their top 10, because in most cases these are the largest holdings, should investors be given more information to understand the risks and strengths in their portfolio?

Fund holdings: What the rules require

There's no law spelling out exactly what investment funds must disclose about their holdings. But the Financial Conduct Authority (FCA) requires funds to follow the Investment Association's Statement of Recommended Practice. These demand a full portfolio statement, listing every investment asset and liability, in the annual and half-yearly long reports behind the headline factsheet.

Some asset types have separate presentation rules, but the principle is the same.

The catch is timing. Annual reports can be published up to four months after year-end and half-yearly reports up to two months after the half-year. Because the snapshots are six months apart, the latest complete picture can be nearly 10 months out of date by the time the annual report deadline arrives.

But for investors, knowing more can avoid over-concentration and better understand their market exposure. But are they always useful?

The top 10 is a convention, not a rule

If you want to see a fund's 10 largest holdings, the latest factsheet is generally easy to find. But if you want more than the top 10, then that may not be so easy to find.

Publishing just the top 10 is not because of the regulator. The FCA doesn't require a monthly factsheet at all, let alone prescribe the top 10 format funds use when they publish one. Publishing the top 10 is an industry convention, not a regulatory judgement about how much investors need to see.

Anything beyond those 10 holdings sits in the fund's long report, which must list every investment asset and liability. It takes more digging to find than a factsheet, but that's where the full picture sits.

That full list can reveal changes the top 10 misses. It can show whether the manager's stated process is still visible in the portfolio, whether concentration has shifted and whether several funds you own increasingly hold the same companies. Smaller positions can also expose sector, country or company-type bets that the headline names miss.

Having the ability to see the full portfolio doesn't mean every new holding deserves an inquest. Active managers are paid to make decisions, and investors who second-guess every trade can create problems of their own.

But while questioning every individual trade is one thing, checking whether the fund still resembles the one you chose is another.

Funds transparency

Greater transparency is usually seen as a good thing. But it has its downsides. If, for instance, a manager reveals an unfinished trade too quickly, other investors can trade ahead of it, copy the idea or push the price against the fund.

The academic evidence points to a trade-off, not a simple case for more disclosure. Parida and Teo (2018) studied US mutual funds that moved from semi-annual to quarterly disclosure after the 2004 SEC rule. Funds that had performed well under the old regime subsequently lost about 22.5 basis points, or 0.225 percentage points, a month. The effect was particularly pronounced among funds holding illiquid portfolios.

Other research identifies further drawbacks. Agarwal et al. (2015) found that mandatory portfolio disclosure could improve stock liquidity, but at a performance cost for some funds. Xin, Yeung and Zhang (2024) linked more frequent reporting to window dressing: reshuffling a portfolio just before it is due to be seen. These are both US studies, and neither directly shows what monthly disclosure of near-current holdings would do to UK funds.

Full transparency can give investors a false sense of security. Woodford Investment Management published the full portfolio of the Woodford Equity Income Fund from its launch in 2014 and was widely praised for doing so. But after prolonged disastrous performance, the fund was suspended in 2019 and closed soon after.

Full holdings are still useful as they can show unusual or unquoted positions and prompt harder questions than a headline list ever could.

What they can't tell investors is how easily assets could be sold into redemptions, how uncertain valuations were or whether governance would hold up under pressure. Transparency can sharpen due diligence, but it cannot replace it.

How to check fund holdings

To see what’s in your fund, you may have to do the homework yourself. Begin on the manager's website. If there's no spreadsheet or report, find the latest annual or half-yearly report and search for "portfolio statement".

If it's hard to find, don't read too much into that. Treat it as an information disadvantage, not evidence of bad management or an automatic sell signal.

Once you have the full portfolio, check both the holdings date and the publication date. They can be months apart.

Then compare the latest complete portfolio with the previous one. Look for new and exited positions, changes in concentration, shifts in sector or geographic exposure and growing overlap across funds. You are looking for material change, not trying to reverse-engineer every trade.

Investors need enough visibility to spot material change; managers need enough delay to finish trading without being front-run. Making a recent, complete portfolio easy to find is a reasonable place to start.

When INPP – International Public Partnerships (LSE: INPP) – invested in the Thames Tideway Tunnel project in 2015, many investors thought its directors and managers were mad. Weren't infrastructure projects in the UK always delivered late and massively over budget? The project was a carve-out from the financially stretched Thames Water and would surely be dragged down by it.

Instead, the 16-mile super-sewer under the River Thames from Acton to Beckton was completed as planned in March 2024. In the year to 31 March, it “diverted over 20 million tonnes of sewage and drain overflow that would otherwise have polluted the River Thames and prevented over 1,000 spills”. This represents a 95% reduction in the volume of untreated waste water entering the river.

Win-win investing from INPP

Infrastructure investment is often denigrated as being expensive off-balance-sheet financing of projects the public sector should do itself. However, the success of Tideway shows why bringing in the private sector can help construct and manage infrastructure projects at a reasonable cost to the taxpayer, as well as offering good returns for investors.

INPP's stake in Tideway is one of its largest, representing 15.6% of its £2.9 billion of net assets. The investment in gas distributor Cadent is of a similar size, while a stake in 11 offshore transmission owners (OFTOs) is over 20%. The latter does the boring but essential job of connecting offshore wind farms to the onshore grid.

Lower down the list is the 4.2% invested in BeNEX. The British political class may have become disillusioned with the separation of Britain's railway system into network infrastructure, rolling stock and operating franchises, but Germany has copied the model. BeNEX has concession agreements with 14 of Germany's 16 federal states and owns more than 130 trains.

Last year, the trust won a deal to contribute £254 million to the construction of Sizewell C nuclear power station in return for a 3% stake, of which £35 million has been invested so far. The investment is “expected to generate an annual cash yield of 6% through construction and early operations, with a significant step-up in yield once fully operational”.

Meanwhile, it is trimming mature investments, selling part of its stake in Angel Trains, which owns over one-third of the UK's passenger rolling stock, for £3millionmn. It has also reduced its exposure to public-private partnerships (PPPs) through asset sales – this week, it sold stakes in 15 London schools for £58 million – and handing back concessions as they expire.

INPP’s shift to higher returns

This is part of a broader trend. Over the years, International Public Partnerships and its peers have moved away from the lower-risk PPP projects into ones that are riskier, but offer higher returns, such as Tideway and Sizewell. 3i Infrastructure (LSE: 3IN) was the first to do so, and International Public Partnerships and Pantheon Infrastructure (LSE: PINT) followed. More recently, HICL Infrastructure (LSE: HICL) has announced a further shift away from the PPP “yielders” in the portfolio (currently 53%) into “growers” (currently 47%) and “enhancers”, such as data centres and leisure facilities. This is expected to increase its annualised total return to 10%, from 8.5% historically.

The infrastructure funds have been held back in recent years by rising gilt yields, but discounts have fallen in the last year and operational performance has been good. Discounts to net asset value (NAV) range from 5% (3iIN) to 15% (HICL). Yields are between 3.5% (3iIN) and 6.1% (HICL), with dividends likely to rise with inflation.

International Public Partnerships is on a discount of 7%, yielding 6% and has 72% of its assets in the UK. A writedown of its £24 million investment in a UK broadband firm this week is not material (0.9% of NAV) and guidance is unchanged. Despite a 24% return over one year, it continues to look attractive.

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The UK’s investment trusts are declining in popularity with the country’s investor base, new research suggests.

Financial consumer site Boring Money’s latest investment trust report shows that investment trust ownership among UK investors has fallen to its lowest level since the company started tracking adoption in 2021 – falling from 12% to 9% in the last year.

The report, based on four surveys (the largest of which included 6,000 nationally representative UK adults) reveals a stark fall in the percentage of 35-54 year-olds owning investment trusts, where adoption fell from 12% to 7% over the last six years.

“[US activist hedge fund] Saba created upheaval in the industry and highlighted the importance of the retail investor vote,” said Holly Mackay, CEO of Boring Money. “This coupled with declining levels of adoption is a real call to action for boards [of investment trusts] to engage with the customers of tomorrow, and demonstrate the role that trusts have to play in an investor’s portfolio.”

A lower percentage of UK investors holding investment trusts doesn’t necessarily mean they’ve become less popular in absolute terms though, given there are now more UK investors than ever before.

But Boring Money also noted a decline in the proportion of assets held in investment trusts on individual investment platforms, indicating ownership is declining in absolute terms too.

Why is investment trust ownership declining?

Investors appear to be favouring simpler and often cheaper vehicles over investment trusts.

Exchange-traded funds (ETFs) have surged in popularity recently: over the last six years, ETF ownership has nearly quadrupled from 5% to almost 20%.

“ETFs feel easier for people to compute,” said Mackay. “They have become synonymous with cheap and easy. Investment trusts are still thought to be difficult and old-fashioned.

“Trusts are trying to compete with 60 page PDFs and complex explainers and this misses a key point about getting through to retail investors,” she continued. “Beyond the hobbyists, most people want to spend as little time on this as possible. It’s about delivering key messages succinctly and with limited space.”

Boring Money’s research suggests that 45% of today’s investment trust holders have held their investment trusts for 10 years or more, compared to 18% of ETF holders, and that eight times as many investors bought ETFs for the first time in the last year compared to investment trusts.

“To try to capture some of the growth going to ETF providers, investment trusts have more to do to communicate their benefits to a broader investor base which has higher expectations for simple, compelling messaging and competitive price points,” Mackay said.

How is the investment trust industry responding?

The investment trust industry is moving to address this communication deficit.

“Investment trusts have fantastic benefits for investors of all ages, but we need to make sure that more people are aware of them,” said Nick Britton, research director at the Association of Investment Companies (AIC), an industry body representing UK investment trusts.

The AIC is launching a campaign aimed at raising awareness of investment trusts among investors aged 25-44. This is an interesting demographic to target: Boring Money noted that investment trust ownership among under-35s has increased from 7% to 9% since 2021, in contrast to the age group immediately above it, where adoption fell

“Investment trusts are particularly suitable for younger investors because their investment horizon is long and they can back exciting companies like SpaceX at an early stage of their development,” said Britton. “They can also use gearing [borrowing] to enhance returns and offer access to many parts of the market that other kinds of funds can’t reach.”

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."