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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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.”

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.

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."

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

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

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

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

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

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

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

What the Saba vote means for investors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The rules for investment trusts with wide discounts

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

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

Who benefits the most from buybacks and tenders?

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

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

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

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

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

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

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

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

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

Why you should consider investment trusts

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

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

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

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

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

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

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

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

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

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

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

Why is Edinburgh Worldwide proposing share tender offers?

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

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

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

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

See also: Saba launches investment trust ETF.

Saba won’t support Edinburgh Worldwide tender offers

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

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

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

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

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

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

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

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

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

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

Commercial London property is highly sought after

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

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

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

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

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

Derwent's unjustified discount

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Could tendering your investment trust shares trigger a tax bill?

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

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

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

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

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

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

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

Focus on smaller REITs

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

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

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

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

Attractive yields

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

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

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

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

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

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

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

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

What changes is Scottish Mortgage proposing to its investment process?

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

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

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

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

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

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

Why are private companies hard to value?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pershing Square's bet on government-sponsored enterprises

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

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

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

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

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

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

Huge upside for Pershing Square

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

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

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

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

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

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

Investment trusts at a crossroads

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

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

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

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

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

The worst of times is the best of times

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

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

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

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

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

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

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

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

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

How will Edinburgh Worldwide’s proposed tender offer work?

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

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

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

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

What is different about Edinburgh Worldwide’s tender offer?

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

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

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

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

Could the FCA change the rules around activist investors?

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

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

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

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

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

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

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

Saba Capital Management (Saba), the New York-based activist hedge fund that has shaken the UK’s investment trust sector over the last year and a half, has launched a product enabling investors to buy into its strategy.

Saba, in partnership with exchange-traded fund (ETF) white-labeller HANetf, launched the Saba Capital Investment Trusts UCITS ETF (LON:UKIT) on 5 March.

This actively-managed ETF will hold UK-domiciled investment trusts trading at a discount to net asset value (NAV), similar to those that Saba has targeted since November 2024.

“Saba brings deep expertise in the investment trust and closed-end fund universe, with a long track record of identifying opportunities created by discounts to NAV and corporate actions within the sector,” said Hector McNeil, co-founder and co-CEO of HANetf.

As an activist investor, Saba’s strategy revolves around building a stake in discounted closed-ended funds and then pushing for corporate actions that will narrow the trust’s discount in the short term. This is known as closed-ended fund arbitrage.

The ETF will be managed by Saba’s founder and CIO Boaz Weinstein as well as partner and portfolio manager Paul Kazarian.

“The £250 billion-plus UK investment trust sector is undergoing a fundamental realignment, with renewed attention on narrowing discounts creating an ideal environment for a trust-focused active ETF,” said Weinstein. “We designed UKIT to help investors capitalise on this shifting landscape – empowering investors to profit from discounts to NAV, rather than suffer from them.”

Which investment trusts does Saba’s ETF hold?

As of 5 March, the top three non-cash holdings in Saba’s investment trust-focused ETF were IP Group PLC (LON:IPO), an investment company that invests in technologically and scientifically innovative businesses; biotech-focused investment trust Syncona (LON:SYNC); and private equity investment trust Harbourvest (LON:HVPE).

UKIT’s fourth-largest holding was Edinburgh Worldwide (LON:EWI), the growth-focused investment trust whose board Saba attempted to displace earlier this year, as well as at the start of 2025.

The ETF also holds Allianz Technology Trust (LON:ATT), in which Saba disclosed a 4.9% stake on 5 March, as well as Unite Group (LON:UTG), Pantheon International (LON:PIN), Henderson Smaller Companies (LON:HSL), Montanaro European Smaller Companies (LON:MTE), Polar Capital Technology (LON:PCT), Baillie Gifford Japan (LON:BGFD), Brown Advisory US Smaller Companies (LON:BASC), Bankers Investment Trust (LON:BNKR), Scottish American (LON:SAIN) and Schroder UK Mid Cap Fund (LON:SCP).

As of 5 March, 55% of UKIT’s assets were held in cash.

Some £568 million has been invested into Venture Capital Trusts (VCTs) this tax year, representing a 4.3% rise year-on-year (£545m) and 16% more than 2023/24 (£491m).

There are currently around 20 VCTs are currently open to investments and more savers are expected to pile in ahead of major changes.

But experts are predicting an exodus after April, when one of the main incentives to invest will be curtailed.

VCTs are a type of fund that invests in small, often early-stage, companies not yet listed on the main stock market. To qualify for VCT investment, businesses must meet certain criteria including having fewer than 250 employees and gross assets below £15 million.

Some investors believe VCTs are worth investing in because of the potential to achieve greater gains by backing fledgling firms, which often grow at a much faster rate than their larger counterparts.

But these are higher-risker investments compared to other popular funds among DIY investors, with a greater chance of failure. But to compensate for that, currently the government offers generous tax breaks. Investors can put up to £200,000 a year into VCTs and, provided they hold the shares for five years, get 30% tax relief, as well as tax-free dividends and capital gains.

But a major shake-up, announced in November’s Autumn Budget, will see the relief slashed to 20% from April 6. See our diuscussion on how the Budget will hurt you in our podcast - MoneyWeek Talks - which you can also watch on YouTube.

We look at if VCTS still be worth it and why you may need to act now to take advanatge.

Should you invest in VCTs?

In a survey of 512 VCT investors by the platform Wealth Club, some 84% said they would stop investing or invest less after the relief is cut.

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), which is calling for the government to reverse its decision, said: “It’s hard to square the decision to cut VCT tax relief with the government’s ‘pro-growth’ agenda. It’s a vital incentive for investors to risk their money and cutting it will impact businesses, which will struggle to find funding elsewhere.”

This is not unprecedented – VCTs have been tinkered with multiple times over the years. In 2003-4, the last time VCT tax relief was 20%, just £50 million was invested, according to the wealth manager Evelyn Partners.

When the relief was doubled the following year, the amount invested increased tenfold to £505 million, and rose to £779 million a year later. When the relief was cut to 30% in 2006/07, investment dropped to £267 million. By last year, investment levels had recovered to £895 million, but that could now be about to plunge.

Jason Hollands, managing director at Evelyn Partners, says: “Tax relief has long been the key driver of VCT demand because their track records can be patchy. Many investors will conclude that 20% relief is an insufficient incentive to entice them to back vehicles that invest in illiquid and high-risk companies.”

Other changes are more positive. The amount companies can raise through VCT investment in a single round will double to £10 million (£20 million for knowledge-intensive companies), and the “lifetime” amount they can raise will double to £24 million (£40 million for KICs).

It means businesses can attract more investment from the outset and raise more when they are ready to scale. If VCT managers put more into proven companies, this could improve returns and reduce risk for investors.

Rupert West, manager of the Puma VCT 13, says: “It means we can be a more valuable partner to the most attractive scale-ups and support our winners for longer, so investors get exposure to a more mature, better diversified portfolio over time.”

Some of Puma’s most successful VCT investments have included the snack brand Love Corn, the non-alcoholic beer company Lucky Saint, and Aveni, which provides AI solutions for financial services firms.

But there could be a downside, warns Andrew Wolfson, chief executive officer of Pembroke Investment Managers. If VCTs raise less money, and managers invest more in their existing holdings, then early-stage businesses could lose out. “As fewer funds are raised, fewer new investments are made, so less capital reaches the early-stage companies that VCTs were designed to support,” he says.

Pembroke VCT has successfully exited positions in the food company Pasta Evangelists and the fashion firm Me & Em. Recent new investments include the payments platform Ryft and customer experience software provider Serve First.

What are the alternatives to VCTs?

There are alternatives for investors who want more tax-efficiency than a VCT. Enterprise Investment Schemes (EIS) are an obvious place to look.

EIS invests directly into fledgling businesses. Investors may cherry pick individual companies themselves or there are managed funds, but these tend to hold only a handful of firms, compared with a VCT, which might invest in up to 100 companies. Either way, this is high risk and usually only for experienced, high-net worth investors.

Davies says: “The tax benefits of EIS have always been extraordinary. But compared with VCTs, they are very illiquid and, while you get the tax relief back quickly, returns can take a long time to come - if at all.”

Investors can put up to £1 million a year into EIS and get tax relief of 30%, as long as they hold the shares for three years. From April, the amount that can be invested in EIS companies will also be doubled to £10 million. This could mean managers start targeting bigger businesses, which could reduce risk and improve returns.

Seed Enterprise Investment Schemes (SEIS) offer even greater tax relief of up to 50%, but involve investing into the tiniest of start-ups - companies must be less than three years old, have fewer than 25 employees and gross assets below £350,000.

Hollands is sceptical that either EIS or SEIS are appropriate for many people. He warns that they are not a straight swap for VCT investors seeking a tax-efficient alternative.

But VCTs are not yet down and out. For investors with the risk appetite, the prospect of fast growth and the chance to own a slice of the Next Big Thing, means they still merit consideration, says Davies: “The fundamental investment case for VCTs still stands; if you want to back fast-growing UK companies, you need to look at them.”

He likes the Octopus Apollo VCT, which is up 54.8% over five years, according to the data provider Trustnet. “It is pretty dull and invests predominantly in B2B software companies that are generally later stage,” says Davies. Its investments include smart thermostat firm Switchee and human resources tech provider Sova.

Hollands likes the Albion Enterprise VCT, which has returned 50% over five years, and is skewed towards software and healthcare companies. Its largest holdings include weight loss medication firm Oviva and Runa Networks, which provides technology for digital gift cards.

VCT investment may take a hit from April as savers digest the changes, but in this dynamic part of the market, tax relief is not the only reason to invest - consider it, instead, as the cherry on the cake. And, given past tinkering, there is always the chance that the tax relief could be raised again in the future.

Saba Capital Management, an activist investing hedge fund based in New York, announced plans to displace the board of Edinburgh Worldwide Investment Trust (EWIT) for the third time in little over a year on 10 February

Days later, it followed up with a proposal seemingly aimed at capturing the hearts and minds of EWIT’s shareholders, who have decisively voted down its proposals so far. Saba now recommends that, should its proposals be voted through at the trust’s upcoming AGM, the new board offers current shareholders a 100% cash exit at 99% of the trust’s net asset value (NAV).

“While we reiterate that the new Board will be fully independent from Saba, we recognise that shareholders would like the choice not to continue with the company,” said Saba in a statement on 12 February. “Therefore, we recommend that the new directors, if elected, offer all shareholders a 100% cash exit at 99% of the company’s NAV.”

Shareholders of Edinburgh Worldwide (LON:EWI) rejected Saba’s proposals at a requisitioned general meeting in January 2026. The vote echoed the result of a similar proposal last February, when EWIT was among seven UK investment trusts whose boards Saba attempted to replace with appointees it had nominated.

Saba was convincingly beaten in both votes, with 98.4% of votes cast at last year’s vote and 92.7% at this year’s having been cast against the proposals (excluding Saba’s own votes).

Why has Saba proposed a cash offer for EWIT’s shareholders?

Saba maintains that EWIT has consistently underperformed relevant stock market indices in terms of performance and has claimed that a sell-down of the investment trust’s flagship holding, Elon Musk’s SpaceX, was mishandled in order to facilitate a merger with fellow Baillie Gifford-managed trust, Baillie Gifford US Growth (LON:USA).

But so far, it has been unsuccessful in persuading EWIT shareholders to agree.

“Only three weeks ago, a record 70% of shareholders participated in the second vote in less than a year, with an overwhelming majority (93%) of non-Saba holders again rejecting its proposals,” said a spokesperson for EWIT in response to the news that Saba was proposing a third vote. “Despite this decisive outcome and the strong shareholder opposition to Saba taking control, Saba is evidently choosing not to listen.”

The trust’s shareholders appear to be reluctant to remain invested in a vehicle that may pursue a different strategy under the new board of directors (Gabriel Gliksberg, Michael Joseph and Jassen Trenkow) that Saba is proposing.

Could other trusts be targeted by Saba?

While it appears that Saba is for now focusing its efforts on EWIT, it has substantial stakes in other UK investment trusts, prompting speculation that further corporate actions could be incoming.

Two of these trusts have attempted to pre-emptively dissuade Saba from taking actions against their boards by offering a tender offer to shareholders at close to NAV.

Saba rejected one of these, from Herald Investment Trust (LON:HRI), meaning the tender offer was withdrawn on 3 February. Herald’s board is in discussions with Saba over an alternative proposal that will enable Saba to exit the trust that is amenable to the hedge fund. If no agreement can be reached, the board has proposed a backstop tender offer with a lower voter threshold, meaning Saba couldn’t effectively veto it.

The other, Impax Environmental Markets (LON:IEM) is due to vote on the tender offer at a general meeting on 23 February.

Investors hoping to put money into venture-capital trusts (VCTs) before the end of the tax year may need to move quickly. Several popular funds appear to be at risk of selling out well before then, following changes announced in the Budget that will cut tax relief on VCTs from 6 April 2026 onwards.

In November, chancellor Rachel Reeves announced that the up-front income-tax relief available on investments in new VCT shares will fall from 30% to 20% from the start of the 2026-2027 tax year. Venture-capital trusts will remain generous, offering tax-free income and capital gains as well as the up-front relief, but advisers say investors are rushing to secure the higher rate while it’s still on offer.

Albion, for example, has already picked up £68million of the £90million of VCT funding it hopes to raise this year. Northern has raised £64million of an £80million target. Baronsmead, aiming for £30million, is on £22million. Other funds have reached similar funding levels, despite there still being more than two months until the end of the tax year.

“We’ve seen £140m of VCT sales over the past three weeks compared to £79million in the same period last year,” confirms Alex Davies, CEO of investment platform Wealth Club. There’s a precedent for this. In 2006, when a previous chancellor reduced income-tax relief from 40% to 30%, sales spiked in the run-up to the change and then slumped 65% in the following tax year.

VCTs offer tax benefits because the government is keen to incentivise investment in small, early-stage businesses that often struggle to raise capital. The funds build portfolios of such firms to diversify risk, but investors get additional protection via the tax breaks. One recent survey of VCT investors found that 42% planned to stop putting money into these funds once the tax relief falls in April.

The rush to invest in this year’s new issues may accelerate in the coming weeks, with only new VCT shares qualifying for up-front income-tax relief. Critically, VCT managers set caps on fundraising. Venture-capital trusts must invest 80% of their assets in qualifying companies within three years, so managers try to avoid finding themselves with more money to invest than their likely flow of good-quality deals can justify.

Several funds have already announced “overallotment” allocations, where they raise a little more than initially expected. But funds must be careful not over-raise, for fear of being forced to invest in less attractive opportunities simply to comply with the VCT rules.

The Budget announcement has prompted criticism from the VCT sector. James Livingston, a partner at Foresight Group, warns: “It means a rush for this year’s VCT investment, as investors look to maximise current tax relief, but the longer-term effect is likely to be less capital available for innovative UK businesses.”

That said, the Budget also included more welcome adjustments to the VCT regime. The chancellor raised the amount of money that VCTs are allowed to invest in individual companies from £10million to £20million – and up to £40million in “knowledge-intensive” companies. She also doubled the maximum size of companies eligible for VCT investment, from £15million to £30million. “By allowing VCTs to back larger, later-stage rounds, the investible universe expands and the quality of opportunities improves,” says Rupert West, fund manager of Puma VCT 13. “We can be a more valuable partner to the most attractive scale-ups and support our winners for longer, so investors get exposure to a more mature, better diversified portfolio over time.”

Venture-capital trust portfolios are maturing

In theory at least, the changes may enable VCTs to take larger stakes in portfolio companies that have done more to prove they are viable and potentially commercially successful. That should reduce the risk profile of VCT portfolios and underpin stronger long-term investment performance.

Still, VCT managers anticipate the negative publicity around the tax-relief reduction will outweigh any boost enjoyed from the more positive changes. “There is a very real risk of reduced cash inflows into the VCT sector,” says Andrew Wolfson, CEO of Pembroke Investment Managers. “VCTs are highly sensitive to investor incentives.”

One closely watched new issue will be the Gresham House VCTs, which are seeking to raise up to £95million. The offer, which opened this week, has been brought forward, with Gresham House previously indicating it would not conduct a fundraising in 2025-2026. Previously operating as the Mobeus VCTs, the funds have proved popular in previous years.

In addition to investing in a timely fashion, investors will need to choose their funds with care. One result of funds raising such large sums this year will be a big pool of capital chasing a limited number of investment opportunities. It therefore makes sense to favour VCTs with a strong record of securing exposure to the best underlying businesses.

VCTs have identified some impressive businesses in the past. High-profile ventures built with the support of VCTs’ capital include property website Zoopla, food-delivery service Gousto and the clothing marketplace Depop. However, the nature of investing in small businesses means there have also been multiple failures.

In fact, the long-term record of VCTs isn’t particularly impressive. Data from the Association of Investment Companies reveals that the average fund has delivered a return of 49% over the past ten years, comprising capital growth and dividends reinvested. The average investment company has returned 206% over the same period. It’s a reminder to tread carefully – and not to invest in VCTs simply to get a tax break.

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Barings Emerging Europe trust was dealt a hammer blow by Russia’s invasion of Ukraine. Around 28% of its assets were invested in Russia and instantly became worthless. The share price slumped to barely half its early 2022 peak by late 2023.

Yet Barings and the board decided to soldier on. They widened the investment remit to include the Middle East and Africa as well as Eastern Europe and Central Asia, and renamed the trust Barings Emerging EMEA Opportunities (LSE: BEMO). The share price has since climbed back almost to its high of four years ago, although it still trades at a 17% discount to net asset value (NAV). The board has persistently bought back shares, leaving a trust with net assets of £110million.

How Barings Emerging Europe trust diversified its portfolio

BEMO’s catchment area is a curious collection of markets. Asia accounts for over 80% of the MSCI Emerging Markets index and Latin America is 8%, leaving around 11% to Emerging Europe, Middle East and Africa. Many of these – the Gulf states and the northern half of Eastern Europe – can hardly be called emerging any longer. There is no geographic, political, economic or social homogeneity across the disparate region at all. However, that makes it very well diversified across sectors, companies and opportunities.

South Africa was a key driver of last year’s 26% investment return, making up 31% of the portfolio at year-end. This included over 5% in each of two gold miners – AngloGold Ashanti and Gold Fields – and over 6% in Naspers, an internet, technology and multimedia investor that indirectly owns 31% of Chinese tech giant Tencent. South African banks have also been good performers, thanks to an improving political and economic backdrop.

Eastern Europe, especially Poland (13% of the portfolio) has been another bright spot, helped by rapid growth that leaves it on a path to overtake much of Western Europe in prosperity. Investments in Hungary and the Czech Republic have also performed well, while Greek banks have benefited from the country’s recovery. With oil prices depressed, relative performance has been helped by avoiding Saudi Aramco. The 22% allocation to Saudi Arabia more broadly held performance back, but not the 10% exposure to the United Arab Emirates.

Turkey, accounting for just 5% of the portfolio, would be an area of opportunity if its government’s economic mismanagement were to improve. The fund is not currently invested in Central Asia, or in Africa other than South Africa. An end to the Ukraine war could be a potential future bonus. While BEMO’s investments in Russia are valued at zero, they could at some point be valuable. The managers have been able to sell a few of them in recent years.

Deserving to survive

Last year’s performance built on a good recovery in 2024. The discount has scope to fall further, which would enhance performance. The shares yield a reasonable 2.5%, with dividends having been raised 5% in 2025. The trust has no borrowings at present, but does not rule out gearing to enhance performance.

BEMO is of a similar size to BlackRock Latin America (LSE: BRLA), which returned 44% in 2025 after five miserable years. It is unfortunate that both trusts are in danger of disappearing as a result of being regarded as “sub-scale” by the big wealth managers. While BEMO passed a continuation vote in October, 33% of votes cast were against the resolution.

A wind-up of either trust would leave their region unrepresented except as an after-thought by the emerging markets generalists that are heavily focused on Asia. The last year has shown that this would be a terrible mistake; there is every chance that these two neglected regions will outperform Asia over the next few years. Both trusts deserve to be at least twice their current size.

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Investment trusts are popular among DIY investors but activist investor Saba Capital Management may have rattled some nerves as it starts the new year with a bang.

Already it has initiated a second attempt to oust the board of Edinburgh Worldwide, but the proposals were rejected. It has also revealed a 5.3% stake in GCP Infrastructure, and seemingly got its way on converting Smithson to an open-ended fund.

Saba, a New York-based hedge fund group, launched its unprecedented campaign in December 2024 and is only gaining momentum. It has proposed to replace boards, narrow discounts and shake-up strategies.

While some experts have questioned Saba’s motives, others say some kind of intervention was overdue: boards had become complacent, with discounts too wide, performance lacklustre, and fees uncompetitive.

Could Saba pursue more close-ended funds?

Why are activists interested in trusts?

Saba, run by former Deutsche Bank trader Boaz Weinstein, has stakes in 46 of the 305 UK-listed investment trusts, with positions of at least 10% in 16 of them. Its biggest stakes are in Herald Investment Trust (30.7% as of mid-January) and Edinburgh Worldwide (30.1%).

But it is not the only activist in town. Allspring has stakes in 46 investment trusts, and 1607 Capital Partners in 40, according to wealth manager AJ Bell. Plenty more are operating on a smaller scale.

A wide discount is often likely to pique an activist’s interest. Investment trusts trade at two prices: the net asset value (NAV) is the value of its underlying assets divided by the number of shares, and the share price, which is what investors actually pay to buy and sell shares.

When the share price is higher than the NAV, the trust is trading at a premium. When it is below the NAV, it is trading at a discount. At a 10% discount to NAV, investors can effectively purchase 100p worth of assets for 90p. If the discount closes, they make a profit – this is often the main goal of an activist.

Large discounts and vulnerable trusts

There may be reason to worry about trust discounts. Look out for trusts that have persistently underperformed their peers and are trading on a wider discount than their sector average. For example, the average discount in the Global sector is 8%, but Lindsell Train’s is 21.3%. Over three years, the trust has returned -27.7% versus a sector average of 37.9%, Trustnet data shows.

Consider sectors, too. Just three of the 19 trusts in the UK Equity Income sector have beaten the market over ten years. This could make the group a target as investors may be more likely to ditch underperforming active investments in favour of passive ones that track the market.

Dan Coatsworth, head of markets at AJ Bell, suggests Scottish American as potentially vulnerable; an underperformer trading at a 9.2% discount, significantly wider than the 3.1% average for its Global Equity Income sector. Coatsworth says: “The trust is managed by Baillie Gifford, which runs various other trusts already subject to campaigns by Saba. The activist might feel compelled to turn the screws on Baillie Gifford given the latest Edinburgh Worldwide defeat.”

Some infrastructure trusts are being targeted because their assets are in demand but the sector is not popular with investment trust users.

Thomas McMahon, head of investment companies research at Kepler Partners, says: “In this scenario, a better return can be made by selling the assets or buying back large amounts of stock, rather than investing in the portfolio. Sometimes external activists can see this more clearly, while the manager may have their head in the sand.”

Watch for notifications. A trust must alert the stock exchange if their holding in a company passes 3%, and then each time that stake moves up or down by 100 basis points. That should mean the arrival of an activist doesn’t come as a surprise.

This can be more difficult to gauge if the shares are owned through other vehicles or derivatives, says McMahon, but investment boards and market commentators can help decipher these holdings.

While the arrival of an activist can cause a stir, it isn’t necessarily a sell signal. Depending on their motivations, activist investors can be a force for good.

James Carthew, co-founder of Quoted Data, says: “When you have a strategy that isn’t working and investors are selling but the board isn’t taking action, then someone pushing for change can be a good thing.”

He points to Alliance Trust as one example. After the activist Elliott appeared on its register, major changes were made to the running of the trust, which eventually merged with Witan. “That was a catalyst for positive change,” says Carthew.

Even if an activist’s proposals are not passed, their presence can jolt a board into action. That can be seen in the industry’s behaviour since Saba emerged. The average discount has narrowed from 15% at the end of 2024 to 12% today, according to the Association of Investment Companies (AIC), an industry body.

Annabel Brodie-Smith, communications director at the AIC, says: “Boards have been taking steps to protect themselves. Last year saw a record 27 deals, including mergers, acquisitions and liquidations. It was also a record year for share buybacks and fee changes.“

But Saba has been accused of trying to make a quick buck, rather than pushing for meaningful changes in the long-term interests of shareholders. Carthew says: “Normally activists don’t buy enormous stakes and try to force things to happen. They buy smaller stakes, suggest ideas and take other shareholders along with them.”

To determine whether an activist has shareholders’ best interests at heart, look at their track record to see what they have done before. Read their proposals and the response from the investment trust board to get a feel for both sides.

Weigh up their motivations against your own and don’t get distracted by a potential short-term gain. Look at CQS Natural Resources, says Carthew: the trust announced a tender offer last May, giving investors the option to sell at NAV. Its discount had already narrowed from 15% to 5%, but many investors exited. But the share price has since doubled, giving those who stayed a far more significant gain.

Why investors should vote

Consider why you hold the trust. If your original reasons for investing still stand, don’t get side-tracked, and be sure to vote on any proposals. Brodie-Smith says: “Remember that investment trusts are not for a quick buck, they provide a long-term approach to investing, and many offer consistent and rising income over time.”

With so much drama surrounding the industry, some investors could be tempted to eschew trusts altogether. Carthew believes that would be a mistake. Activists are a normal and healthy part of the market and, while they create a lot of noise, they are a relatively small piece of the pie.

Investing in potential activist targets could even be a good strategy, says McMahon, if their goal is to unlock value. Coatsworth adds: “Boards have realised that trusts cannot limp along and hope for the best – when something isn’t working, the alternatives must be explored.”

US hedge fund Saba Capital has again failed in its latest attempt to take over an investment trust for its own ends. Last week, shareholders in Edinburgh Worldwide (LSE: EWI) rejected Saba’s proposal to remove all six independent non-executive directors and replace them with Saba’s three nominees. Out of the total votes cast, 53% of shares were against the resolutions – a figure that flatters Saba because it includes its own 30.7% stake. Just 7% of non-Saba shares cast backed the hedge fund’s plan.

Yet whatever your views on Saba Capital and the ambitions of its aggressive founder Boaz Weinstein, you can say one thing in its favour. There’s no doubt this whole saga has been tremendous for shareholder democracy in the UK.

In praise of hedge fund activists like Saba

Global hedge-fund managers are driven by profit above all else. In a sector known for cut-throat competition, they have to be. Managers need to justify their high fees. Hedge funds manage around $5trillion worldwide, split across a handful of large managers and thousands of smaller players, all fighting for assets. Investors want to see results or they will pull their money and take it elsewhere.

This dog-eat-dog nature means hedge-fund managers often turn to activism. If your investment is underperforming, the best hope for improving short-term performance is to shake things up and install new management who will help you achieve your goals.

If the changes unlock value, all shareholders should benefit. And other investors don’t have to stay along for the ride if they don’t want to. The system is designed to give shareholders, both large and small, the ability to cast their vote and have their say – even if the very nature of this process means those with the biggest stake ultimately have the most input.

However, something has gone terribly wrong with UK shareholder democracy over the past two decades. The shift away from individual shareholdings to large platforms and nominee shareholdings has muddied the water between what shareholders are entitled to and what they expect.

This is not entirely the fault of large platforms. Individual investors have been complacent during this shift and so have boards. Some of the conversations I’ve had with investors, analysts, brokers and (the more active) board members over the past two years have brought to light some shocking revelations about the lack of interest shown by some boards and managers towards their investors. Saba’s arrival has given these boards a jolt.

How Saba is restoring shareholder democracy

Following Saba’s initial attack on seven investment trusts, including Herald (LSE: HRI) at the beginning of last year, the Association of Investment Companies (AIC), the industry body for investment trusts, called for changes to company law to ensure platforms are required to exercise shareholders’ right to vote. The call forced some long-overdue changes by platforms. Shareholders should be prompted to vote on every occasion, whether or not there’s an activist at the door. They should be encouraged to hold boards and managers of all funds, trusts and individual companies to account.

Saba’s activities have forced boards and investment platforms to rethink their approach. Technology is making it easier for shareholders to exercise their voting rights without substantial cost. Turnout for Edinburgh Worldwide’s recent vote was around 70%, an all-time high. Many of those who voted will have done so for the first time and will now be more likely to vote in the future. Sources tell me investment companies are now making a concerted effort to improve communication with shareholders. This is a great outcome for all shareholders, but it should also put managers on notice. Many investors now understand their rights for the first time. That is a great victory for shareholder democracy.

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It is nearly eight years since healthcare and biotech investor Sam Isaly abruptly stepped down from OrbiMed, the managers of the Worldwide Healthcare Trust (LSE: WWH). In the 22 years in which he was lead manager, WWH achieved an annualised return of 16.8%, the highest in the investment trust sector.

Since WWH continued to perform well for the next four years, it didn’t really matter. However, there followed four years of dismal performance in which the share price fell 30% and underperformed the MSCI World Health Care index before a recovery in the last six months.

Meanwhile, Isaly began building a new funds business. Exome Asset Management now runs a little over $200million, with nearly half in its Worldwide Healthcare Partners (WHP) strategy, but has already built a formidable performance record. In the year to the end of November, the fund returned 70%, after achieving 88% in the previous six (despite two down years). He sees plenty of opportunities in the sector.

Focus on China’s emerging biotech industry

“Pharma is facing the largest patent cliff in history, with $300billion of sales at risk – 20% of the total market – between 2025 and 2030,” says Isaly. “Pipeline replenishment is necessary.” Larger companies will either need to innovate or acquire new products through acquisition. Hence, the WHP portfolio is heavily weighted to biotech.

To help innovation, the US Food and Drug Administration (FDA) has cut the review time for “breakthrough therapy designations” from 12 to two months. Nine companies have been granted this designation for pipeline drugs. This could allow drugs for ultra-rare diseases to reach the market without full clinical trials.

Isaly has also focused on China’s emerging biotech industry. China has passed the US in the number of clinical trials registered, with 1,903 in 2024 versus 1,499 in the US and 899 in the EU. Moreover, Chinese biopharma companies have proved willing to license out products, accounting for 60% of global licensing deals in the first quarter.

Hence WHP has a relatively high exposure in China. This includes Hong Kong-based Duality Biotherapeutics, which is developing “next-generation” antibody-drug conjugate (ADC) therapy to treat cancer and autoimmune disease. ADC is a therapy whereby a monoclonal antibody, able to evade the body’s immune system, is chemically linked to a drug. It binds to specific proteins found on cancer and other malignant cells, enabling the drug to enter the cell and kill it without harming other cells. Isaly calls Duality “high risk with no drugs yet on the market, but the best in its class and with a promising candidate for a particular form of lung cancer”.

California-based Guardant Health, a gene-sequencing-based diagnostics firm comparable to Illumina, is medium risk, he says. Its blood tests can detect signs of remaining cancer after treatment or identify it at an early stage. Isaly expects profitability in 2027.

Korean listed Celltrion, one of the world’s three major biosimilar companies, is least risky. Patent expirations open up the market for biosimilars – drugs which are very similar to existing patented ones. Celltrion “should become dramatically profitable in 2026”.

Hedge-fund strategy

Maybe Isaly will one day return as an investment trust manager. For now, he runs WHP as a hedge fund, with both long (159% of net assets) and short (71%) positions across 40-55 holdings. Isaly is supported by five highly qualified analysts, who also manage three smaller funds, including an emerging markets healthcare fund.

For eligible investors, WHP is open for investment monthly, with quarterly redemptions subject to 65 days’ notice. The management fee of 0.6% is low, but there is a generous performance fee. This may not be encouraging, but the best funds are often those that are hard to access.

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Big is often better when it comes to investing, but some of the smallest investment trusts can be some of the best performers.

We are used to putting our money into megacap stocks like Nvidia and Microsoft, especially in an era where rising levels of index investing compound the advantages of putting money into the biggest stocks.

But does the same apply to investment trusts?

“Investment trusts come in all shapes and sizes but it tends to be the largest trusts that attract most attention,” said Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), an industry body that represents investment trusts.

“That’s a shame because small can be beautiful in the investment trust industry,” Brodie-Smith continued. “There are some smaller and relatively low-profile trusts that could make excellent additions to investors’ portfolios, but they don’t always get the interest they deserve.”

Some of the best-performing investment trusts are some of the smallest. Three of the best-performing trusts of 2025 have less than £200 million in assets, according to the AIC’s analysis.

And there are ways in which smaller investment trusts offer specific advantages compared to their larger counterparts.

Why smaller investment trusts can be better

Investment trusts – a type of closed-ended fund – offer several unique advantages to investors, not least active management – the potential of beating the index.

But their structure also makes them the ideal vehicle to access smaller, less liquid companies. Small cap stocks and private firms can sometimes offer the best long-term growth prospects, but their small size means they can be illiquid.

That causes problems for open-ended fund managers, as redemptions could force them to sell off these long-term investments at inopportune moments. Investment trusts don’t have this problem.

And smaller investment trusts are even better-suited to this purpose than larger trusts. A large investment trust investing in a micro-cap stock will quickly become its largest shareholder, without that company forming a significant part of its portfolio.

Smaller investment trusts can be more nimble on this front. As such, some have specific mechanisms in place to ensure that they remain small.

River UK Micro Cap (LON:RMMC), for example, has a share redemption mechanism designed to keep its net asset value (NAV) at around the £100 million mark. According to its latest report, this is “in order to:

• enable the Company to exploit fully the underlying investment opportunity and to deliver high and sustainable returns to Shareholders, principally in the form of capital gains;
• enable portfolio holdings to have a meaningful impact on the Company’s performance, which might otherwise be marginal within the context of a larger fund; and
• ensure that the Company can continually take advantage of the illiquidity risk premium inherent in micro-cap companies.”

Last year, MIGO Opportunities Trust (LON:MIGO) implemented a similar mechanism to ensure that its NAV wouldn’t exceed £150 million. It also reduced the number of holdings in its portfolio – as an activist investor, this enables it to have a more influential stake in each.

The best small investment trusts

According to analysis from the AIC, these were the three top-performing investment trusts through with total assets below £200 million:

^{Source: theaic.co.uk / Morningstar (to 31/12/25). Returns in base currency.}

Saftar Sarwar, chief investment officer at Binary Capital, picked out CQS Natural Resources Growth & Income as one of the most appealing small investment trusts.

“Stellar performance in 2025… may not be a transient phenomenon,” said Sarwar. “It could reflect a deeper narrative. The world’s insatiable demand for critical minerals and energy, driven by energy transitions, major technological advancements and geopolitical realignments, provides a robust, long-term tailwind.”

Saba Capital Management (Saba), a US-based activist investor hedge fund, has been defeated in its attempt to displace the board of Edinburgh Worldwide Investment Trust (EWIT).

In November, Saba requisitioned a general meeting of Edinburgh Worldwide (LON:EWI) shareholders that took place this afternoon (20 January), where shareholders voted on Saba’s proposals to replace the investment trust’s board with three independent directors it had selected.

As well as what it described as persistent underperformance and stubborn discount to net asset value, Saba also questioned EWIT’s sell-down of its SpaceX holding. It argued that the stake in Elon Musk’s space exploration company had been trimmed at far below its potential value (assuming a $1.5 trillion IPO next year) in order to facilitate a merger with Baillie Gifford US Growth (LON:USA).

Saba’s proposals were overwhelmingly defeated. In total, 53.2% of votes cast were against the proposals. Excluding Saba’s votes, 92.7% of votes were cast against the proposals.

“For the second time in less than a year, Edinburgh Worldwide's shareholders have voted decisively to reject Saba's proposal to install its own nominees to the Board and the uncertainty that would have entailed,” said Jonathan Simpson-Dent, chair of Edinburgh Worldwide.

Shareholders representing more than 70% of issued share capital voted on the resolutions – a record shareholder turnout.

Shareholder advisory services ISS and Glass Lewis had both recommended that shareholders oppose the proposals ahead of the vote.

What does Edinburgh Worldwide defeat mean for Saba?

Saba has been building its position in other closed-ended funds, having recently pushed for a managed wind-down of real estate investment trust Workplace Group (LON:WKP).

But the string of defeats it has now suffered, including two consecutive votes at Edinburgh Worldwide, could make it hard to justify continued attention in the UK investment trust sector.

Two other trusts in which Saba has built up a significant stake – Herald Investment Trust (LON:HRI) and Impax Environmental Markets (LON:IEM) – have pre-empted any attempt to challenge their management by proposing a share tender at close to NAV that would be contingent on Saba tendering (materially) all of its shares.

“Saba remains our largest shareholder and we will continue to seek constructive engagement with them to develop potential solutions that allow us to move forward,” said Simpson-Dent.

He added, though, that “following a year of significant and costly distraction, we are ready to return our full attention to our primary purpose: investing in innovation, transformation, and exceptional potential in a way that respects the clear wishes expressed by the majority of shareholders both last February and again today”.

We have two portfolios: one focusing on capital growth and one on income generation with potential for capital growth. For investors focused on the former portfolio, The Schiehallion Fund (LSE: MNTN) is a late-stage private-equity investment company managed by Baillie Gifford.

The group has had a tricky few years as late-stage growth investing moved sharply out of favour. However, we now see clear “winners” of its investment approach, with some of its largest holdings, namely Elon Musk’s SpaceX (which comprises 14% of the portfolio) and digital acquisition-focused Bending Spoons (15%), achieving valuation levels rarely found in private equity. With the listings market potentially warming up once again, The Schiehallion Fund contains valuable assets that may potentially be revalued further into a listing on the public market. Meanwhile, investors can access Schiehallion shares at a 17% discount to the sum-of-the-parts valuation.

Income generation with potential for capital growth

For investors concentrating on income generation with potential for capital growth, 3i Infrastructure (LSE: 3IN) is a company that invests in private European infrastructure businesses. Its long-term record is exceptional, with an annualised total return of 13% since 2015. The group’s approach to investing in infrastructure gives it significant influence over its portfolio companies, many of which enjoy highly contracted cash flows supporting predictable returns for investors.

The trust’s jewel in the crown is TCR, the largest independent lessor of airport ground-support equipment, operating in 230 airports across more than 20 countries. TCR is now confirmed for sale, which has the potential to be beneficial for performance if an uplift versus carrying value can be achieved.

Meanwhile, 3IN’s current dividend yield is 3.5%, and the company has grown its dividend ahead of inflation over the past five years – a difficult feat in the high-inflation environment investors have experienced in recent times. Investors can access 3i Infrastructure’s shares at a discount of around 7% to the sum-of-the-parts valuation.

For investors focused on a blend of capital growth, income generation and diversification from exposure to developed markets, Invesco Asia Dragon Trust (LSE: IAD) is an investment trust concentrating on Asian equities. Asian and emerging-market equities have suffered a lost decade. While economies have grown, corporate earnings growth has stalled: earnings per share (EPS), measured in US dollars, are close to the same level as in 2015.

We believe Chinese technology companies remain some of the world’s most innovative businesses, and are now showing meaningful signs of being friendlier to shareholders, such as embarking on large share buybacks and introducing dividends.

IAD’s managers, Fiona Yang and Ian Hargreaves, have demonstrated a strong ability to generate performance in different market environments, using a highly stock-specific investment approach. Furthermore, the trust pays shareholders an aggregate dividend equivalent to 4% of its prior financial year-end net asset value (NAV) in four equal instalments, providing a balance of income to investors as well as exposure to Asian equities with strong growth potential.

The extra income is achieved by using the company’s reserves – a defining feature of an investment trust versus an open-ended fund – to top up the natural income generated, allowing the managers to invest freely rather than target solely high-yielding stocks.

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The MoneyWeek investment trust portfolio was set up in 2012 with a simple principle: to help readers build a global, all-weather, set-and-forget portfolio. There have been a few changes over the years – the latest was the removal of Mid Wynd (LSE: MWY) in April 2025 after a manager change and a period of underperformance – but the goals have remained the same.

Today, the portfolio contains Personal Assets (LSE: PNL), JP Morgan Global Growth and Income (LSE: JGGI), Scottish Mortgage (LSE: SMT), Caledonia (LSE: CLDN), Law Debenture (LSE: LWDB) and AVI Global (LSE: AGT).

In 2025, an equally weighted portfolio of these six trusts produced a total return of 13.1%. By comparison, the Vanguard LifeStrategy 60% Equity Fund – a simple proxy for a 60/40 equity/bond portfolio – returned 11.6%, while the MSCI World index had a net total return in sterling terms of 12.75% – the third consecutive year of double-digit returns for the index.

How the MoneyWeek investment trust portfolio fared in 2025

Growth-focused Scottish Mortgage provided the largest boost to overall returns, adding 24.7% for the year. That amounted to a contribution to the overall portfolio of 4.1%. The trust’s returns were helped by an end-of-year surge after SpaceX said it was planning an initial public offering (IPO) in 2026 and aiming for a $1 trillion-plus valuation.

After re-valuing its stake to reflect this, Scottish Mortgage’s net asset value (NAV) stood at 1,303.47p per share as of 31 December 2025, up from roughly 1,200p at the beginning of the month. SpaceX now makes up 15.3% of the fund, up from 8.2% at the beginning of December, with the stake worth as much as £2.2 billion today, up from £508 million in September.

At the defensive end of the spectrum, Personal Assets Trust returned 10.4% last year, supported by a near 12% allocation to gold as the yellow metal surged 64.5% in 2025. Over the past five years, the trust has still lagged its benchmark, the UK Retail Price Index. However, last year’s return – its best since 2021 – regained some lost ground.

Shares in Caledonia also picked up in 2025 after several years of lacklustre performance. The trust’s total return of 11.5% reflected underlying NAV growth and the closing of the discount. The NAV rose 4.7% in 2025, according to the most recent available figures, following an 8.3% increase in 2024. Caledonia’s returns have been held back by its exposure to private equity (about a third of the portfolio), where valuations have suffered as managers have been unable to offload holdings via IPOs. However, with the pipeline of rumoured IPOs filling up for next year, that could change.

Law Debenture yielded the best performance

Of the three public equity trusts in the portfolio – Law Debenture, JGGI and AVI – UK-focused Law Debenture yielded the best performance with a total return of 22.3%, contributing 3.7% to the portfolio’s overall return.

JGGI disappointed, with a total return of 2.9% for the full year. This was the worst performer in the portfolio. Although its NAV rose 7.3%, the trust’s shares began trading a discount to NAV – the first time it’s traded at a sustained discount in nearly a decade – and this partly offset the portfolio gains. Part of this shift can be attributed to its overweight position in US equities (+7.6% compared with the MSCI World). US stocks underperformed global peers last year, and with political risks growing, investors are only becoming more wary.

AVI’s global value portfolio also underperformed last year with a return of 7%. However, we like its strategy of trying to unlock value by activist engagement with companies and its exposure to Japan and Asia.

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Saba Capital Management, a New York-based activist investor hedge fund, may be targeting more UK-listed closed-ended funds in the run-up to the general meeting it requisitioned with shareholders of Edinburgh Worldwide (EWIT).

On 13 January, Saba disclosed that it had written to the board of real estate investment trust (REIT) Workspace Group (LON:WKP) on 8 January urging it to proceed with a managed wind-down (a process whereby the fund sells off its assets in preparation to cease operations).

The letter highlighted that Workspace was trading at a discount to net asset value (NAV) of 45%, among the highest in Saba’s database of REITs.

“Despite a stable operating platform and capable management team, an increase in valuation has not been realised,” said Paul Kazarian, partner at Saba Capital Management in the letter. “Instead, the discount has become entrenched, signalling lack of confidence from the market that the company can deliver equity value through long-term reinvestment or expansion.”

Kazarian also highlighted refinancing challenges and structural impediments in the shareholder base (specifically that a small number of shareholders hold a high proportion of its shares, constraining liquidity and hampering the potential of shares to increase in value).

“We believe that the Company’s assets would have a higher value, closer to NAV than the current share price, if offered to a larger acquirer or acquirers with the resources available to maximise their cash flows, reduce operating costs and finance them at a lower cost,” said Kazarian. “A managed wind-down would allow NAV to be realised directly rather than waiting for a persistently sceptical market to recognise it.”

The letter emerged a week before shareholders in Edinburgh Worldwide (LON:EWI) are due to vote on Saba’s proposals to displace its board with three independent directors of its own choosing. The proposal will be voted on at a general meeting scheduled for 20 January.

Herald and Impax Environmental Markets attempt to ward off Saba

The disruption that Saba is causing at some closed-ended funds is prompting the managers of others in which Saba holds a significant stake to take preventative action.

On 9 January, Herald Investment Trust (LON:HRI) – which, like EWIT, was one of the seven trusts that defeated Saba’s proposals last year – issued a tender offer that would enable shareholders to redeem their shares in the trust at or close to NAV.

The offer is conditional on Saba tendering all (or materially all) of its holding in HRI, which was 30.7% at the time of Herald’s proposal.

“This proposal will enable long-term shareholders to remain invested with the current successful manager and mandate they have chosen, while also providing a full exit route to short-term shareholders,” said Andrew Joy, chairman of Herald Investment Trust. In other words, it offers shareholders that doubt the current management’s ability an exit route, without relinquishing control of the trust.

“The board has assessed that it is not sustainable to do nothing given that a process of attrition may eventually see Saba able to win a simple majority vote even though it itself is a minority shareholder,” said Joy. “Accordingly, the board has carefully considered a wide range of options, including during lengthy discussions with Saba.”

Impax Environmental Markets (LON:IEM), of which Saba holds 20.7% of shares, put forward a similar offer on 16 January.

Saba hasn’t yet called for any action from IEM, but IEM’s board appears to believe that the large shareholding built up by the hedge fund is destabilising and that Saba is positioning to move the trust’s strategy away from its current focus on environmental markets.

IEM is currently the only UK-listed investment trust that targets environmental solutions.

“The board cannot stand by while Saba’s actions create an environment of uncertainty and risk for all our shareholders,” said Glen Suarez, chairman of IEM. “The continuation tender offer proposed today is designed to provide shareholders with the choice to exit at close to NAV if they have a short-term investment horizon, or to remain invested in IEM and benefit from the long-term growth prospects of an environmental markets strategy, once Saba’s destabilising influence has been removed.”

As of 15 January (the day before the tender offer was announced), IEM shares traded at a discount of 8.85% to NAV.

Both the investment trusts’ boards have outlined a backstop tender offer proposal that will be put forward in the event that Saba blocks the continuation tender offer (which it is able to do given the size of its shareholding). This would require a lower voting threshold to implement, meaning Saba couldn’t block it unilaterally.

Both trusts’ boards say that this will give shareholders the opportunity to redeem their shares at close to NAV without being forced into remaining invested in a vehicle that Saba effectively controls.

Last year was a horrible year for the active fund-management industry. Investors have consistently been pulling money from active investment funds over the past decade, but outflows accelerated in 2025. According to data compiled by Bloomberg Intelligence, more than $1trillion flowed out of US active mutual funds last year, up from around $600billion in 2024. Investors moved into passive exchange-traded funds (ETFs), adding more than $600billion last year. The trend is much the same in the UK, albeit with smaller numbers.

This might appear to suggest the end is nigh for the UK’s listed fund-management sector, but that’s not entirely the case. Figures available indicate that only two of the listed managers are on track to report a decline in assets under management (AUM), according to analysis from Peel Hunt. Those managers are Liontrust and Impax Asset Management, which lost two key mandates from St James’s Place. That will drag group AUM down by as much as 23.3% for the year.

Polar Capital (Aim: POLR) is the standout performer. At the end of September, group AUM sat at a record £26.7billion, up from £23.2billion at the end of June. Net outflows for the quarter totalled just £58million, compared with £632million in the prior quarter. The company’s success can be attributed to its position as a specialist manager that’s focused on a handful of key sector mandates. At the end of September, the firm’s open-ended funds accounted for 75% of assets, with investment trusts making up 23% and segregated mandates the remainder. Tech and healthcare strategies accounted for 51% and 14% of AUM, respectively. This does mean the firm is overexposed to these sectors as a manager, but over the past decade, it’s been on the right side of the fence.

Polar Capital's deep roots in technology

It’s hard to argue that technology and healthcare won’t continue to attract investors’ interest over the next decade. These sectors might encounter some turbulence along the way, but tech and healthcare will remain two of the most exciting and promising thematic trends. Under the new CEO’s stewardship, Polar plans to double down on the markets that have helped it become one of the UK’s top boutique fund managers.

The group’s roots are in technology. It was created by Brian Ashford-Russell and Tim Woolley, who left their positions at the Henderson Technology Trust, managed by Henderson Investors, to set up the new boutique in 2001. Backed by Caledonia Investments, the self-managed investment trust Polar grew quickly despite the dotcom bubble, reaching $2billion in AUM by 2005. Henderson Technology Trust, launched in 1996, became the Polar Capital Technology Trust, a core of the group’s fund range. Since launch, the tech trust has returned 14.7% per annum (to 30 April 2025) by correctly timing key turning points in the tech world, such as the rise of Big Data in 2010 and AI as early as 2017.

The firm’s flagship open-ended tech fund, the Global Technology Fund, was launched at Polar’s inception. Today, it’s far bigger than the trust, although they’re both managed by the same team. The key difference is concentration. The trust has 91 positions, compared with 65 for the open-ended vehicle. But the trust is more concentrated, with 53% of the portfolio in the top-ten holdings, compared with 47% for the open-ended fund.

Iain Evans is a promising new boss

In September, Iain Evans was appointed CEO after 21 years with the company. Evans is planning on doubling down on what’s worked for Polar – specialism in a few key sectors with select acquisitions. This desire to focus on what works is refreshing in a sector that often appears to be struggling for direction. Many managers have panicked at the rise of passive funds, often wasting money on bolt-on acquisitions in the hopes of achieving growth or expanding into new markets.

Polar is doing the opposite. While that may leave the company at the mercy of the performance of technology, it stands out in a struggling sector. However, the market is not taking its edge into account. Instead, investors are lumping Polar in with struggling managers such as Liontrust and Impax as its valuation sits near the bottom of the range for its fund-management peers.

At the time of writing, shares in Polar Capital are trading at a forward price-to-earnings ratio (p/e) of ten, according to Panmure Liberum, and nine according to Peel Hunt. That’s a deep discount to the fund-manager sector average of 16 (including wealth managers). Fund-managers’ earnings are cyclical compared with the more stable earnings from wealth management, so the shares deserve a discount to the sector average, but a gap of more than 43% seems excessive. Panmure Liberum believes 20% would be more appropriate.

There’s also the company’s dividend. Polar earns its money in both regular fund-management and performance fees. On its asset base of £23.2billion, Polar Capital booked management fees of £86.8million in the first six months of fiscal 2025. For the year ended March 2025, it booked a management fee yield of 78 basis points (0.78%), generating net management fees of £178.3million. It also earned performance fees of £16million for the year, up several million compared with 2024. These could hit £28 million in 2026, Panmure estimates. Although regular management fees already cover Polar’s dividend, the additional performance fees mean the company’s 8.7% yield is more than covered by earnings per share, and should remain so for the foreseeable future.

All in all, Polar offers a cheap, leveraged way to play the global demand for tech stocks, with a market-beating dividend yield on offer as well.

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Andrew Van Sickle: Peter, your fund is among the relatively few investing solely in a collection of investment trusts. How did you come to set it up?

Peter Walls: My background is entirely in the world of investment companies. I was on the sell side with a couple of investment trust broking houses for 18 years before joining Unicorn. I had come to admire the structure of investment companies and noted how it facilitated good, solid returns for investors across an array of assets, regions and industries. So I thought the best way for me to channel my enthusiasm and knowledge was to set up a fund.

The fund itself is actually open-ended rather than closed-ended like the trusts it holds. Unicorn Asset Management set up an OEIC, an open-ended investment company, in 2000 and it was convenient to hang a fund of investment trusts off this umbrella company at launch. The fund, which reached its 25th anniversary at the end of December, has fulfilled its founding objective – to achieve long-term capital growth.

Had I gone down the closed-ended route, I would have had to go through a process of fundraising, and it might have proved difficult. Investment trusts are relatively obscure and poorly understood compared with their open-ended counterparts, so raising money for them is always a hard sell. And if my fund had been an investment trust, I could have ended up with a double discount to net asset value (NAV), making it an even more complicated proposition. The fund is now worth £130million.

Andrew Van Sickle: What are the key advantages of investment trusts?

Peter Walls: The structure of an investment company is semi-permanent, in that a fixed number of shares provides a pool of capital for the manager to invest. In an open-ended fund, money is constantly coming in and out as units are created and cancelled when investors buy and sell, respectively.

The permanent capital makes it easier for the manager to take a genuinely long-term view and take positions in less liquid stocks and asset classes. Investment trusts can use leverage to enhance returns and can smooth dividend payments because they can build up reserves with their holdings’ dividends or distribute capital by way of the dividend. It’s a safety net to help them ride out tough times. Finally, many investment trusts deliver superior long-term returns relative to the open-ended funds in their respective sector.

Investment trusts – good for illiquid assets

Andrew Van Sickle: In which areas does the investment trust structure help most?

Peter Walls: Where investments are illiquid, I’d say: smaller companies, property, infrastructure, private equity. These are dangerous for open-ended funds if there is a stampede out of the sector, as we saw a few years ago with commercial property. They end up in a vicious circle of price declines, forced sales and redemptions, leading to value destruction.

The data show that the illiquid asset classes have historically outperformed, as the study of long-term global asset returns by Elroy Dimson, Paul Marsh and Mike Staunton has shown in the case of small-cap stocks, while private equity also boasts a very good record. But as specialised, obscure areas of the market tend to be highly cyclical, with investors rushing in and out, long-term investors should avoid open-ended structures, as the capital in them can suddenly disappear.

Andrew Van Sickle: The areas you highlight are well represented in your top-ten holdings, I noticed, with HarbourVest Global Private Equity, Oakley Capital Investments and ICG Enterprise Trust covering private markets. You have Aberforth Smaller Companies, too. Japan and Asia, with AVI and Invesco, provide some geographical diversification.

Moving on now, investors seem to have soured on investment trusts in recent years. Discounts to NAV in the investment trust sector are still large, and have been for three years or so. What are the main challenges? Are there just too many investment trusts?

Peter Walls: Consolidation is ongoing; it’s happening every week. Over the past few years, I have tended to lose 10% of my holdings to some form of corporate action every year. There have been more and more mergers between investment companies in recent years, while returns of capital via share buybacks, tender offers and managed realisations are at a record high.

Andrew Van Sickle: We hear a lot about buybacks to shrink discounts to NAV. But does there come a point when you’re essentially shrinking the fund until it’s barely viable, and you’re hastening its demise without narrowing the discount?

Peter Walls: Buybacks are no panacea but can help to moderate share price volatility and manage short-term fluctuations in supply and demand. Some trusts will inevitably dwindle to an unviable size where a more radical solution will be needed. It is, and always has been, a process of natural selection which I see as healthy. The wide discounts that have attracted increased activism in the sector will eventually narrow.

Andrew Van Sickle: I understand there are now quite a lot of bigger trusts and relatively few flotations, skewing the market towards the larger names.

Peter Walls: Yes, a key factor is that consolidating wealth managers are increasingly focusing on larger trusts and are often disinclined to look at smaller ones. Their idea of the minimum size an investment trust should be is always being nudged upwards. Consequently, there is less appetite to support smaller initial public offerings (IPOs), while some minnows will struggle to survive.

Andrew Van Sickle: Could active ETFs pose a risk to trusts? They seem to have become increasingly popular.

Peter Walls: So far, we have only had one trust change its structure to become an active ETF, and it was persuaded to do so by an activist investor. No other investment trusts have gone down that route. It comes back to the liquidity problem when you’re holding high-risk, high-return assets – active ETFs are open-ended structures, so forced selling of illiquid assets can lead to value destruction while favouring those who are first out of the exit.

Investment trusts – proving their worth for more than 150 years

Andrew Van Sickle: Can you explain the recent furore over cost-disclosure rules and how they have led to “doublecounting” for investment trusts? How much harm did this do to the sector’s reputation? Has the situation been rectified now?

Peter Walls: The cost disclosure issue has been a major headwind for the investment trust sector for nearly five years thanks to the European Union’s packaged retail PRIIPs rules, which made many funds appear expensive by double-counting the costs of investment trusts. Last month, the City regulator confirmed that trusts will be able to present their expenses clearly and fairly under new “consumer composite investments” rules, which will apply in 18 months. There are still issues to be resolved in this long-running saga, particularly concerning the treatment of wealth managers. It is to be hoped that common sense will prevail on all aspects of cost disclosure going forward, but it is unlikely that investors that withdrew from the sector in recent years will return any time soon – or ever.

I’m obviously biased as a long-term believer in the structural advantages of investment trusts, but I believe investors should be embracing the unique characteristics of the sector. After all, investment trusts have proven their worth through thick and thin for more than 150 years and have successfully adapted in the face of every conceivable challenge.

Andrew Van Sickle: One recent challenge has been Saba’s activism against investment trusts. What’s your take on it?

Peter Walls: It’s been a bit chaotic at times, but with the many headwinds faced by the sector in recent years, Saba’s founder and chief investment officer, Boaz Weinstein, was pushing against an open door with plenty of capital to back him up. More recently, he seems to have recognised that there is a lot to commend well-run and governed trusts that use their structural advantages and are really prized by most of their investors.

Andrew Van Sickle: Regardless of errors Saba has made, is there a need for constructive activism to sort out underperforming funds?

Peter Walls: There has always been a place for activism in the sector and it’s obviously more likely to happen when discount ratings are wide. While Saba’s claims that they are acting in the interests of “mom and pop investors” may have held water with their US closed-ended fund activism, I don’t think it applies for all of his targets in the UK.

Herald Investment Trust, for example, was a constituent of my portfolio for over 20 years but Saba’s eagerness to build a 29% stake in the trust ahead of the shareholder vote forced me to sell at close to net asset value. Whatever happens next is unlikely to be value enhancing.

Andrew Van Sickle: In which areas are there the greatest problems around governance and transparency and confidence? Have too many boards been asleep?

Peter Walls: Saba’s recent purchases point to the fact that most conventional, equity-invested trusts have seen their discounts narrow this year. Capital will have been recycled from Saba’s successes and their presence on so many share registers has spurred on more boards to take proactive action. Mergers, tenders and share buybacks have been running at record levels, leading to a favourable improvement in the supply/demand situation.

So, the focus has shifted to the alternatives sectors, real estate and deeply discounted private-asset situations, notwithstanding the ongoing Edinburgh Worldwide/ BG USA battle with Baillie Gifford. Unsurprisingly, these are the areas where governance and transparency are more likely to be considerations – witness the now abandoned HICL/TRIG merger – because many of these alternatives only came into existence in the low-interest rate, post financial-crisis period.

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The £2.7 billion Monks Investment Trust (LSE: MNKS) sits in the shadow of its £13 billion Baillie Gifford-managed stablemate Scottish Mortgage (LSE: SMT). However, it boasts a strong record, it is less concentrated – no holding exceeds 5% of total assets – and unquoted investments account for just 6% of the total. So it offers an interesting, lower-risk alternative to SMT.

Indeed, over five years, Monks’ investment return has been 26% against 11% for SMT, and over three years, 47% against 51%. In the last year, helped by its higher exposure to private equity, SMT has moved ahead – returning 17% against 10% – but Monks has outperformed most other global trusts over one and three years.

Monks delivers global growth

“Growth doesn’t have to come at the expense of resilience,” says deputy manager Helen Xiong, who will take over when Spencer Adair retires this year after 26 years in charge. “The US market multiple of earnings is high relative to its history, but that doesn’t mean it’s expensive. It is more concentrated than it has ever been, with the S&P’s top ten accounting for 40% of the index’s value, but giant companies are still growing at double-digit rates. Twenty years ago, the largest companies were mature and facing diminishing returns to scale.”

The portfolio is divided into three sections: rapid growth, stalwarts and cyclical growth. Rapid-growth companies are usually founder-led and expanding into new markets, so execution is critical.

Take food delivery group DoorDash, which has expanded into the UK recently by buying Deliveroo. Its rival JustEat is owned by Prosus, the fifth largest holding in the portfolio, but the bulk of Prosus’s value comes from owning 23% of Chinese tech giant Tencent.

Stalwart growth companies such as Mastercard and Disney are established, durable businesses that are self-funding and growing at 10-15% per annum. Meanwhile, cyclical growth companies are capable of double-digit growth in the long term, but not evenly. When profits fall at times, companies should continue to invest, as budget airline Ryanair did during the pandemic. “Its valuation premium hit a historic low of 10% recently despite growth expectations much better than the market,” says Xiong.

“We look for internal drivers of growth rather than macro-driven ones.” Yet Monks is prepared to be opportunistic. “A strong rally in poor quality value companies gave us the opportunity to buy growth companies at good valuations recently, such as MSCI, Games Workshop and Keyence.”

Monks's long-term focus

Xiong is refreshingly honest about mistakes. “We have been wrong on Novo Nordisk,” she admits. “Our thesis that obesity would change from being a lifestyle to a more complex metabolic problem was right but we were wrong on execution.” Uber has been “a great product but not a great business” – although that may be changing as “other robotaxi operators will want to use the simplicity of the Uber network”.

As with all Baillie Gifford funds, Monks focuses on stocks for the long term rather than prognostications about the market or the economy. The portfolio turnover is just 20% annually. Borrowings for investment purposes are 8% of net assets, indicating little concern about a “bubble” in growth stocks or AI.

“I don’t believe AI is a bubble,” says Xiong. “It has the potential to change more of the global economy than the mid-teens percent of the economy accounted for by the internet. The growth rate and quality of the largest companies justifies their valuation, rightly a little higher than the market.”

For those who want global growth, but are nervous of SMT – or have enough exposure to it – Monks remains an attractive alternative.

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The independent voting adviser ISS has recommended that shareholders vote against activist investor Saba Capital Management’s proposals to replace the board of Edinburgh Worldwide Investment Trust (EWIT) at the upcoming general meeting on 20 January.

“For a second time within a year, independent voting adviser ISS has recommended that shareholders vote against ALL of Saba's resolutions,” said Jonathan Simpson-Dent, chair of Edinburgh Worldwide (LON:EWI). “We strongly encourage shareholders not to be complacent and remind everyone that Saba holds a larger shareholding and therefore more voting power this time.”

Simpson-Dent also confirmed he would host a live Q&A session to answer any shareholder questions at 2pm on Friday 9 January.

On 27 November 2025, Saba announced plans to requisition a general meeting of Edinburgh Worldwide’s shareholders, aimed at replacing the investment trust’s current board with three independent directors of its choosing. This followed similar attempts at seven investment trusts last year.

That attempt was unsuccessful, with shareholders of all seven investment trusts rejecting Saba’s proposals.

Saba questions EWIT’s SpaceX selloff

On 7 January, Saba sent an open letter to the board of EWIT requesting transparency over its sell-down of approximately one third of its holdings in SpaceX in October 2025.

SpaceX, the space exploration company founded by Tesla CEO Elon Musk, is targeting an IPO in 2026 that would value the company at $1.5 trillion, according to Bloomberg.

In December, SpaceX sold insiders’ shares at $421, approximately double the $212 per share sale in July which valued it at $400 billion – implying a current value of $800 billion.

It follows that any sale of shares by EWIT during October would have been at a valuation somewhere between $400 billion and $800 billion, substantially below the value that SpaceX is targeting in its IPO.

SpaceX is, for many investors, the greatest appeal of owning EWIT.

Saba maintains that the trust sold off a third of its shareholding at an inopportune moment in order to facilitate a potential merger with Baillie Gifford US Growth Trust (LON:USA), another investment trust that is managed, like EWIT, by Baillie Gifford.

EWIT and USA discussed the merger with Saba, but the activist investor rejected the move. Given the size of Saba’s shareholding in both trusts, the merger cannot take place without its support.

Saba put nine questions to EWIT’s board regarding the sell-down of its stake in SpaceX, which it estimates cost the trust £37 million, and the proposed merger with USA. It requested a response to these questions by 9 January.

“Unless and until we receive satisfactory responses to these questions and concerns, we reserve all of our rights, including to issue proceedings on behalf of EWI,” said Weinstein.

EWIT’s chair, Jonathan Simpson-Dent, is hosting an open Q&A session to respond to shareholder questions on Friday 9 January at 2pm GMT.

A spokesperson for EWIT said: “Saba’s open letter today adds to the numerous inaccurate statements and misleading assertations it is making designed to mislead shareholders as part of this US hedge fund’s aggressive campaign to achieve its ultimate objective – to seize control of the Company to prioritise its own commercial interests to the potential detriment of other shareholders. We look forward to answering shareholders' questions in an open Q&A session this Friday, where we will also address Saba’s misleading assertations on SpaceX.”

Saba’s concerns over EWIT board explained

Saba’s open letter follows a presentation published on 29 December, in which Saba provided further detail on its reasons for seeking to displace EWIT’s board.

In the presentation, Saba disputed EWIT’s claims that Saba is seeking to take control of the investment trust and has failed to disclose its plans, arguing that the independence of the board members it has proposed means that Saba won’t have any control over the trust and that it therefore doesn’t know what their plans might be.

It criticised EWIT’s claims to be maximising long-term value for all shareholders, claiming that EWIT’s NAV and share price returns have trailed relevant benchmarks over the past three and five years, as well as claiming that the proposed merger with USA would serve Baillie Gifford’s interests rather than those of shareholders.

It drew attention to Simpson-Dent’s previous position as chief financial officer of HomeServe from 2007 to 2009. The FCA fined HomeServe over £30 million for breaching its Principles of Business between 2006 to 2011. Saba claimed that the FCA’s fine of HomeServe and criticism of HomeServe’s board and senior management – both of which Simpson-Dent was a member of – were not disclosed when he was appointed to EWIT’s board.

In response, a spokesperson for EWIT issued the following statement: “Saba’s presentation contains numerous inaccurate statements designed to mislead shareholders as part of this US hedge fund’s aggressive campaign to achieve its ultimate objective – to seize control of the Company for its own commercial advantage at the expense of other shareholders.

"Saba clearly hasn’t done its homework. Its claim, for example, that FCA rules were breached by not disclosing certain prior roles of the Chair at the time of his appointment to the Board of EWIT is categorically wrong. A simple read of the Company’s announcement made at the time of his appointment shows that no such breach occurred.

"Saba’s reference to the Chair’s role at HomeServe plc 16 years ago and to the FCA’s subsequent investigation, is a deliberate attempt to cast aspersions on his reputation, despite the fact he was never personally criticised by the FCA or any other regulatory authority.

"Saba is clearly seeking to portray a misleading narrative of weak governance through unfounded assertions while simultaneously campaigning for the appointment of its three US-based nominees selected solely by Saba, none of whom has any experience of UK public companies or UK governance standards.

"Saba’s presentation also provides no information regarding its plans should it succeed in taking control. As set out in our open letter issued today, it is essential that Saba offers full transparency and clarity on its intentions so that shareholders can make a properly informed decision.”

Saba’s presentation can be viewed here.

L&G to vote against Saba’s EWIT proposals

On 6 January, L&G, another institutional EWIT shareholder, announced its intention to vote against Saba’s proposals.

A statement from L&G said that it believes the incumbent board “appears to have been responsive to the contention of underperformance and has effectively managed to reduce its discount to Net Asset Value (‘NAV’).

“Given the potential conflict of interests between Saba, its nominees, and long-term investors, we are therefore again voting against all proposals at the forthcoming meeting, opting to keep the running of EWIT in the hands of the incumbent board at this time,” the statement continued.

According to Bloomberg, L&G holds approximately 0.5% of EWIT’s shares.

Deadline to vote on Saba’s Edinburgh Worldwide proposals approaching

Richard Stone, chief executive of the Association of Investment Companies (AIC), an industry organisation representing UK investment trusts, cautioned this week that the deadline to vote on Saba's proposals is approaching.

“With the vote announced in the busy period just before Christmas, shareholders may not realise that the voting deadline on their platform is next week,” said Stone.

Shareholders casting their vote through an investment platform may need to vote before the date of the meeting. Deadlines for voting through some of the major platforms are below.

^{Source: Association of Investment Companies}

“It’s critical that private investors have their say on a decision which will determine the future of Edinburgh Worldwide,” said Stone. “Saba owns 30% of the shares so that requires a huge turnout from other shareholders if they want to make their voice heard.”

The investments in your pension can have a huge bearing on the size of the pot of money you’ll end up with in retirement.

Investment trusts, while traditionally have been overlooked, are increasing in popularity and are some of the top picks for DIY investors.

Investment trusts can help generate income, deliver strong dividends, as well as give you exposure to private companies.

According to the Association of Investment Companies (AIC), an industry body that represents investment trusts, retail investors now own 26% of investment company shares, compared to 25% two years ago.

“Investment trusts are built for the long haul,” said Nadir Mirza of Tyndall Investment Management. “Pension capital demands patience, governance, and discipline – three qualities that sit at the core of well-run investment trusts.”

Investment trusts that focus on dividend-paying companies have always been a popular pick – and not just among income investors wanting a regular stream of income.

That income reinvested can be a significant boost for growth too. For example, in the UK reinvested dividends have made up around 67% of total returns over 20 years.

So when it comes to your self-invested personal pension (Sipp), which investment trusts should you add? Here’s what the experts say.

Investment trusts for your pension

1. JPMorgan Global Growth and Income (LON: JGGI)

If you are still building your pension – known as the accumulation stage - a global equity trust makes the most sense, says Emma Wall, chief investment strategist at Hargreaves Lansdown.

“The JPMorgan Global Growth and Income trust is a good option, managed by Helge Skibeli who has more than 30 years’ experience, supported by two other managers in London and New York supported by analysts across various continents to help spot the best opportunities across the globe.”

The team looks for companies with attractive valuations, that offer significant potential for growth and are unlikely to suffer big share price volatility. The top 10 holdings will be familiar to investors. Microsoft, Amazon, Nvidia, The Walt Disney Co and Johnson & Johnson are among the largest positions.

Wall adds: “We like it because it has a core approach – neither growth or value biased – and a robust dividend policy paying out quarterly, which can be reinvested for accumulation or take an income for those already in retirement.”

The trust has returned 62% over five years.

2. The Brunner Investment Trust (LON: BUT)

Pete Walls of Unicorn Asset Management favours trusts with greater geographical diversification and “a bit less of the Magnificent 7.”

“In the prevailing, highly concentrated, world market, I have reservations about the fact that many of the global trusts have such a large exposure to the USA,” he said.

“The Brunner Investment Trust styles itself as an ‘all weather’ global equity portfolio. It’s been around for almost 100 years so there’s a good chance it will continue to prosper for long-term pension investors.”

Some of the trust’s top 10 holdings include Microsoft, payments giant Visa, energy stock Totalenergies, chip-maker Taiwan Semiconductor Manufacturing and hotel group InterContinental Hotels.

“Despite having a lower weighting to the rampant US market than some of its peers, portfolio performance has been good,” added Walls.

While the dividend yield is a modest 1.7% it's dividend has increased year on year for the last 53 years. The trust has returned 73% over five years.

3. The Law Debenture Corporation (LON: LWDB)

Investors who believe in a prosperous future for the UK might consider The Law Debenture Corporation, a trust suggested by Walls and Mirza.

The trust balances income stability with long-term growth potential, with around 83% in UK stocks.

Mirza said: “For a pension investor, it’s a compelling combination: dependable income, valuation discipline and genuine flexibility, underpinned by a structure designed to compound quietly over time.”

Its top 10 holdings include banking stocks HSBC and Barclays, car manufacturer Rolls Royce and mining firm Rio Tinto.

It has returned an impressive 100% over five years.

Walls added: “It’s been listed on the London Stock Exchange for more than 135 years, so once again it’s likely to be around for some time to come.”

4. Nippon Active Value Fund (LON: NAVF)

This trust targets Japanese small and mid-cap companies trading below intrinsic value.

“The Nippon Active Value fund is a timely expression of Japan’s long-overdue revival,” said Mirza. “After years of corporate inertia, Japan is finally embracing reform – balance sheets are leaner, governance is improving, and management teams are starting to prioritise shareholder returns. The fund’s activist approach fits this environment perfectly.”

Mirza added: “This hands-on strategy has delivered strong NAV growth in a market that remains deeply under-owned by global investors. For pension investors, this is the kind of exposure that adds genuine diversification and long-term alpha potential – an active, conviction-led play on one of the few major markets still trading at a structural discount to its own potential.”

Top 10 holdings include medical supplies firm Hogy Medical, media company Fuji Media Holdings and environment product manufacturer Ebara Jitsugyo.

The trust has returned 117% over five years.

5. Augmentum Fintech (LON: AUGM)

Should you wish to invest in a specific theme, you could plump for one such as Augmentum Fintech, suggests Dan Boardman-Weston, chief executive of BRI Wealth Management.

“This is a trust that may be suitable for those with a high appetite for risk and a long-term time horizon. It focuses on potential high-growth private companies in the fintech space.”

Augmentum has benefited from being a former shareholder in Interactive Investor. Its top 10 holdings include Tide, which operates banking services for small businesses and online challenger bank Zopa.

Augmentum trades at nearly a 50% discount to the value of its assets. The fund has lost 34% over five years.

“Those with a good appetite for risk and appropriate time horizon should consider a small position as part of a diversified portfolio,” Boardman-Weston added.

How to choose an investment trust for your pension

If you’re considering an investment trust for your pension then there are several things to help with your decision on whether to invest.

“First decide how much risk you want to take, and where in the world you want to invest,” said Laith Khalaf, head of investment analysis at AJ Bell. “Then it’s a question of comparing investment strategies and manager track records, as well as considering costs.”

What a trust invests in is crucial. The top 10 holdings and percentage of the trust’s value held in each company is typically easy to find on a factsheet, which is a document provided by the investment company and refreshed regularly.

You can view them online directly from the fund management company or on an investment platform such as AJ Bell or Hargreaves Lansdown.

Understanding a trust’s strategy is important. “You’ll want to understand how the fund manager aims to deliver a strong return over time without taking too much risk in any one area,” said Nick Britton, research director of the AIC.

“It can be useful to look at the trust’s record – though it does not guarantee future returns – and how it has performed in various market conditions. Investment trusts can borrow to invest, which can boost long-term growth but also adds risk, so check the trust’s current level of borrowing - known as gearing - and borrowing policies so you know how much extra market exposure you may be taking on.”

“As you get closer to retirement, capital preservation may become more important to you. At this time, many people think about reducing their weighting to equities, and there are some trusts that aim to preserve wealth by spreading your investment over assets like equities, bonds, alternatives and cash.”

Since investment trusts typically trade at either a premium or discount to their net asset value (NAV), based on the balance of supply and demand, you should take a look at the discount or premium on the trust.

Khalaf added: “This shouldn’t be a major decision driver for long term investors, unless it’s deviated substantially from the norm.”

Investment trusts are one of the best vehicles for creating wealth over the long term. Yet many of today’s trusts should not exist. Some are too small to make a difference and lack economies of scale. Others are not making the most of the benefits that the investment company structure offers.

An investment trust is set up as a public limited company, which has several advantages over other collective investment vehicles. Their closed-ended structure with fixed capital means that they don’t have to worry about money flowing in and out. That’s perfect for holding illiquid assets and also for borrowing money to improve returns. Meanwhile, the oversight provided by the board of directors should hold the investment manager accountable if the trust underperforms for too long.

However, this structure has two obvious drawbacks. One is overheads. Having an independent board of directors is expensive. Valuing and managing illiquid assets can also be costly and time-consuming. Paying for active investment managers has never been cheap, and it’s even more dear if the trust has an in-house management team, rather than sharing a manager who works across several funds. The combined impact of these costs means that many smaller trusts look expensive to their larger peers or open-ended funds with comparable strategies.

The other is that the share price can – and usually does – deviate from net asset value (NAV). So shareholders cannot be sure if they will be able to sell at close to the value of the assets. In contrast, open-ended funds and exchange-traded funds (ETFs) trade at NAV.

Investment trusts need to start taking their advantages

So trusts need to employ their advantages to justify the disadvantages. Take leverage, which is one reason why trusts have tended to outperform similar open-ended funds over the long term. Trusts can usually borrow at highly attractive rates for long periods. The Scottish American Investment Company (LSE: SAIN), for example, issued three lots of loan notes several years ago, with maturities extending out to 2049 at rates of 2.23% to 3.12%. Yet most trusts just don’t make the most of this opportunity.

Nick Train’s Finsbury Growth and Income (LSE: FGT) has gearing of just 2.4% despite its scale and the manager’s conviction. So investors, managers and boards need to ask if the strategy would work as well in an open-ended structure. For an equity strategy that uses no leverage and invests in liquid stocks, the answer is likely to be yes. If so, there’s no need to operate with the added costs of the investment trust structure. The news that Smithson Investment Trust (LSE: SSON) will convert into an open-ended fund is a good example of this lesson being accepted.

Investment trusts must act soon

The market is slowly getting to grips with these realities. There were five mergers of similar trusts in 2025, with one more planned for early 2026, according to the Association of Investment Companies. Seven trusts and real estate investment trusts (Reits) were privatised – although long-term investors were not happy to see some of them go (eg, BBGI Global Infrastructure). There were 14 liquidations in 2025, the highest number since 2016; one of these, Middlefield Canadian Income, was a conversion to an exchange-traded fund (ETF).

To their credit, some trusts are making changes. There were 40 examples of trusts reducing their fees this year, compared with 32 in 2024 and 26 in 2023. There is more focus on closing discounts, albeit with mixed results. But many need to do more while they still have the chance.

Investors should consider if the trusts they own are worth their place on the market. If they’re not, it may be time to find something better – unless there is a realistic chance of activists forcing a restructuring that could bring windfall gains.

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The scale of private-equity firms has driven them to pursue larger and larger deals. And conditions for these have been getting tougher.

“Across the market, exits are difficult, with many funds full of over-valued assets,” says veteran private-equity investor Jon Moulton. There have been few flotations and listed companies are prioritising share buybacks rather than acquisitions. That leaves other private-equity funds or continuation funds – a fund set up to buy assets from existing funds run by the same firm – as almost the only buyers. Hence returns from large buy-outs have fallen to 10%-12% and investors need to be patient.

By contrast, Moulton – who now invests through his private office to fund medical research – is in a different part of the market. His 40-strong portfolio is invested in deals ranging from “a few hundred thousand pounds to three million at cost”.

It is difficult for most private investors to get exposure to similar opportunities. Wealthy individuals can get access to investment networks, specialist funds or venture capital trusts (VCTs). But these options have high minimum investments, high costs and low liquidity – and recent returns from VCTs (the most visible part of the market) have been poor.

Literacy Capital is offering a surprising discount

However, there is one listed fund investing solely in smaller UK companies. Literacy Capital (LSE: BOOK) was launched in 2017 by Paul Pindar, the former chief executive of Capita, and his son Richard. It was listed in 2021 and now has £312 million of assets. Each year, the trust donates 0.5% of net assets to literacy and education charities – hence the name.

There is plenty more to like about the trust. More than half the shares are owned by the directors (including the Pindars) and the managers. There is no carried interest or performance fees: the management team – other than the Pindars – has the incentive of nearly 600,000 warrants. The annual management fee of 1.5% is relatively low (private equity is very labour-intensive).

The shares have returned 420% since inception in 2017. Yet they now trade at a 27% discount to net asset value (NAV) after a 20% share-price decline over the past year. This is largely a result of recent dull investment performance, with a NAV gain of 2.6% in the 12 months to end September. Nonetheless, sales still grew at 4% for the top-10 holdings, with 9% growth in cash flow. Debt is moderate and holdings are valued at a modest average of 9.5 times cash flow.

Literacy takes both majority or minority stakes in UK businesses that are generating between £1 million and £10 million of cash flow. Typically, these are companies whose founders want to de-risk by releasing equity, some shareholders want to exit, families want to plan for management succession, or where non-core businesses are for sale. Literacy adds value by strengthening management from its connections (more than 45 executives appointed), assisting with bolt-on deals (more than 40 completed) and providing advice.

Literacy Capital's long-term focus

There are 20 positions in the portfolio, with 83% invested in the top 10. The largest holding is RCI Group, a specialist provider of healthcare to the police, custodial and judicial services. It accounts for 30%.

Two new investments and a partial realisation this year have left the portfolio fully invested. “We see multiple new opportunities each day,” says Richard Pindar, but Literacy is in no hurry to sell, and its fee structure is intended to promote a focus on the long term. “Carried interest can encourage managers to sell prematurely.” So the absence of short-term news shouldn’t put investors off – it creates the opportunity for valuation gains and a narrowing of the discount in due course.

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“The true investor… will do better if he forgets about the stock market and pays attention to his dividend returns.” – Benjamin Graham

Dividend income has always been one of the key contributors to equity-market returns, especially in periods of volatility or bear markets. In the 1970s and 2000s, both periods of significant market volatility for the S&P 500, virtually all of the index’s returns came from income, according to data compiled by Bloomberg and Guinness Global Investors. In the 1970s, the index recorded growth of 76.9%, with 17.2 points coming from price appreciation and 59.7 from dividend income. In the 2000s, the index fell by 24.1%, but dividends added 15 points for a total return of -9.1%.

The longer one stays invested, the more critical dividends become. Guinness Global’s data, going back to 1940, reveal that, over rolling one-year periods, the total contribution from dividend income to total return was just 27%, but that number grew to 57% over a rolling 20-year period. They also reveal that $100 invested at the end of 1940, with dividends reinvested, would have been worth approximately $525,000 at the end of 2019, versus $30,000 with dividends paid out. In this period, dividends and dividend reinvestments accounted for 94% of the index’s total return.

The same trend has been observed in the UK. Between 1 January 2000 and 31 December 2019, the FTSE 100 delivered an average annual return of just 0.4%. However, if you include dividends, the index has actually returned 122% over the same period (or 4% a year), according to Schroders’ calculations.

Headwinds for dividend stocks during the pandemic

Still, there’s a reason the figures presented only go up until 2019. Since the pandemic, this relationship has broken down. The latest data from S&P Global show that, since 1926, dividends have contributed about 31% of the total return for the S&P 500, while capital appreciation has contributed 69%. That’s mostly down to the performance of the past five years.

Since the end of 2021, dividend stocks, as defined by the S&P 500 Dividend Aristocrats index – S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years – have produced a total return of just 9% a year compared with 15.6% for the broader S&P 500 index. This decade, dividends have added just 12% to the S&P 500’s total return, the lowest contribution on record, says Hartford Funds.

As Ian Lance, co-manager at the Redwheel and Temple Bar Investment Trust, notes, equity returns have been “driven by a positive re-rating of equities, particularly in the US and particularly in technology stocks”. Dividend stocks were also hit disproportionately hard in the pandemic years. During 2020, $220 billion of dividends were either cut or paused, according to Janus Henderson.

Research by Goldman Sachs found that more than 80% of US dividend exchange-traded funds (ETFs) underperformed the S&P 500 during the 2020 equity drawdown period, and half of them did not bounce back as strongly as the index in the subsequent recovery.

Dividend stocks also “tend not to perform well when interest rates rise”, as Alan Ray, investment trust research analyst at Kepler Partners, notes. “Investors drawn to conservatively managed dividend-paying companies when interest rates were close to zero now find they can buy ‘risk-free’ UK gilts with yields of 4% or 5%, or even just keep cash in a savings account,” says Ray.

When to trust the dividend yield

Despite the headwinds for dividend stocks over the past five years, history shows they can be a safe haven in periods of volatility and uncertainty. What’s more, many income stocks are now trading at relatively undemanding valuations compared with their growth peers, suggesting there’s a bigger margin of safety with these equities in the event of a market downturn.

There’s no official definition of what makes a good income stock, but there’s one thing most of the research on the topic agrees on, and that’s a correlation between yield and quality, or rather the lack of it. While a dividend stock with a high yield might seem attractive as an income play, more often than not the yield is a reflection of traders’ doubt about the sustainability of the payout.

As Martin Connaghan, co-manager of Murray International Trust, notes, “there is no point in being drawn in by a high dividend yield… because that yield is most likely unsustainable and hence false. Stocks that have, on the face of it, very high yields can be vicious value traps if dividends are subsequently cut.”

In fact, research shows that, rather than chasing high yields, investors should instead look to companies offering yields around the 2% to 4% mark. Yield itself should not be used as a gauge of quality. The best way of evaluating the sustainability and quality of a dividend payout is to analyse the quality of cash flows. In business, cash is king. Cash flow gives a good indication of management’s approach to capital allocation.

As Imran Sattar, portfolio manager of the Edinburgh Investment Trust, notes, “For stocks with higher yields it is important to understand the sustainability of that dividend, how much the dividend is covered by earnings and free cash flow, or ongoing capital generation in the case of a bank… and also to think about whether there is anything on the horizon that could change the cash-flow dynamics such as an increased need for investment.”

This view is echoed by Connaghan, who says, “The ability to sustain and grow dividends is essential. Companies with a high cash-conversion ratio, dividend cover and free cash-flow yield should be in a much stronger position to do this.”

Free cash flow is generally defined as the cash flow generated by operations, excluding the costs of running the business and capital expenditures. In a traditional capital allocation framework, if a firm has free cash to spend, it should first reinvest it back into its operations if it can achieve an attractive and sustainable return on investment. If this opportunity is not available, the company should use the money to reduce debt, and if it has no debt, return the money to investors.

Cash flow figures give us a real, unabridged version of what management is doing with a company’s funds. Investors often turn to earnings before interest, tax, depreciation and amortisation (Ebitda) as a proxy for cash flow, as that’s the metric companies usually like to present. However, this ignores essential business costs, such as the replacement of capital equipment, interest on debt and taxes.

Similarly, a simple dividend cover calculation, which generally takes earnings per share divided by the dividend per share, also provides a misleading picture. Earnings per share do not account for all capital expenditure, particularly on long-term assets, which can be extremely costly for capital-intensive companies. When a company pays a dividend, the money leaves the business. That means the capital must be truly surplus to requirements to prevent problems emerging at a later date.

History is littered with companies that have paid out too much during the good times and have struggled with weak balance sheets and a lack of shareholder support in the bad.

The best dividend stocks

The best dividend stocks are those in companies that strike a balance between operational costs, including capital expenditures, and prudent balance-sheet management, along with sensible dividend policies. And they avoid the damaging concept of a “progressive dividend policy”. Progressive policies envisage the dividend rising steadily year after year. They are designed to provide security for investors. In fact, they do the opposite.

Companies always have and always will go through cycles, and making a commitment to increase a dividend year after year, no matter what, forces management into wrong decisions. It’s difficult to cut a dividend when such a policy is in place, which often puts firms in difficult positions, having to pay out more than they can afford.

Some of the most sensible dividend policies are based on small regular payouts, with annual special dividends based on profit throughout the year. This gives more flexibility, allowing management to announce additional distributions as needed without putting undue stress on the balance sheet. Managers can also choose to alternate between dividends and share buybacks, the latter being easier to turn on and off depending on the business environment.

FTSE 100 insurance giant Admiral is an excellent example. Car insurance can be a volatile and unpredictable business. It moves between a hard market when insurance prices are rising and profits are plentiful and a soft market where competition intensifies, prices fall and insurers have to stomach big losses. Managing a business through this cycle requires financial flexibility and a strong balance sheet, so Admiral cannot afford to commit itself to an unsustainable dividend policy. Instead, it commits to distribute 65% of its post-tax profits annually as a regular dividend, supplementing these distributions with special payouts.

For example, for the first half of the year, Admiral declared a regular dividend of 85.9p per share and a special dividend of 29.1p per share, for a total distribution of 115p, or 88% of post-tax profit. This was a pretty hefty interim distribution for the group. In 2021, a bumper year following the pandemic, which forced a change in driving habits and a substantial reduction in accidents, the company’s annual dividend payout reached just under 280p per share. However, in the following years, as drivers returned to the road and started crashing into each other, the company reduced its distribution in line with falling profits. For the 2023 financial year, it paid out just 103p across both its interim and final dividends.

Another example is CME Group. It pays a regular quarterly dividend, equivalent to a yield of about 2% per year. It supplements this with a special distribution at the end of the year based on annual trading performance. Last year, for example, the company paid out four regular dividends of $1.15 per share and one final special dividend for the year of $5.25.

The perils of a regular dividend policy became all too clear in the mining sector back in 2016. That year, commodity prices slumped as China’s previously meteoric growth started to splutter to a halt, leaving mining giants such as BHP, Rio Tinto, Glencore and Anglo American in a difficult position. Not only had these companies made a commitment to hefty, regular, progressive dividends based on past profitability, they had also spent and borrowed heavily to fund growth.

As commodity prices and revenue plunged, something had to give. BHP cut its interim dividend by 75%, the first cut since 1988, and abandoned its progressive dividend policy. Rio also slashed its dividend in half and Glencore was forced into a messy restructuring involving a $2.5 billion cash call, as well as a dividend cut.

In another example, BT had to cut its dividend in 2020 when management realised the company needed to spend more on its fibre build-out to keep up with the competition. This was a big blow for income investors as prior to the cut BT was often touted as one of the UK market’s top income plays.

Where to hunt for dividend income

Sensible capital allocation is a good indicator of dividend quality, as is the overall quality of the business. Quality can be defined in many different ways. Warren Buffett summed it up quite well in his letter to shareholders of Berkshire Hathaway in 1996: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”

To put it another way, a quality company is one that has a strong competitive advantage and a long runway for growth. A strong competitive advantage also typically translates into higher-than-average profit margins, providing the company with ample cash to invest in marketing, growth and debt repayment, and to return funds to shareholders.

James Harries, co-manager at STS Global Income & Growth Trust, says the best income stocks are “predictable, resilient, high-quality businesses” you can “say something sensible about on a five-,seven- and 10-year view”. That often means sticking with the companies that he describes as “steady as she goes” – they often “grow slower, but [grow] more persistently”.

A great example of the strategy, and a recent addition to the portfolio, is Nike. “It’s the highest quality global sports brand,” notes Harries, and though the company is going through some turbulence, “I’m pretty confident that we’re buying a really high-quality asset at a very attractive valuation”. Nike is one of the best-known and valuable consumer brands in the world, boasts a gross profit margin of more than 40%, and has billions of dollars in net cash on the balance sheet. It’s also rewarding shareholders, with $591 million in dividends in the first half of 2026 and $18 billion returned via share buybacks since June 2022.

The utilities sector can also be a good place to hunt for income. “Often a utility company operates in a regulated sector that is supported by a long-term concession contract, which will stipulate the return that can be generated over the life of the concession,” notes Jacqueline Broers, co-portfolio manager at Utilico Emerging Markets. As a result, cash flows can be more “resilient” and “predictable” than those of other sectors. “All of which translates into a more sustainable long-term dividend payout.”

Broers highlights the example of IndiGrid Infrastructure Trust, which owns 41 power projects comprising 17 operational transmission projects, three greenfield transmission projects, 19 solar generation projects, and battery energy storage (BESS) projects located across 20 states and two union territories in India. The average remaining contract life on the company’s transmission assets is just under 26 years, with contracted revenues underpinning the company’s dividend yield of about 10%.

The other advantage utilities tend to have is the prohibitive replacement cost of their assets. Take UK-based National Grid, which owns the majority of the UK’s high-voltage transmission network, comprising thousands of miles of cables and transmission stations. Building these assets from the ground up would be virtually impossible today, not to mention the vast cost. That gives the company a robust competitive advantage.

Utilities aren’t the only companies that can have such an edge. Connaghan points to the likes of Grupo ASUR, a Mexican-listed airport operator with 16 assets across Central and Latin America. “Its key asset is Cancun airport and the company has seen its passenger numbers increase by a compound annual growth rate of 6% over the last 35 years,” he says. “Such was the financial strength of this business in the earlier part of this year that in April, they announced two 15-peso special dividends in addition to a regular dividend of 50 pesos. This put the stock on a 14% dividend yield.”

The fund manager also highlights the likes of Enbridge, a Canadian pipeline business which transports and stores natural gas and oil through its network, which spans North America. The company has grown its dividend for 30 years in a row. “This type of business is far less exposed to the underlying shifts in the commodity prices themselves, as 98% of its Ebitda comes from assets backed by either regulated returns or take or pay agreements,” he notes.

Investment trusts for dividend income

The structure of an investment trust lends itself to income investing. Not only do they give investors access to a well-diversified portfolio of income stocks, but they can also pay dividends out of both capital and income, unlike ETFs and other open-ended investments. That means trusts are more likely to be able to sustain their dividends in periods of market volatility. Trusts with a global mandate also have far more flexibility in where they can invest so they can pick the best income, quality and growth plays in the world.

JP Morgan Global Growth and Income (LSE: JGGI), Murray International (LSE: MYI), Scottish American (LSE: SAIN) and STS Global Income & Growth (LSE: STS) all have a global mandate. Ecofin Global Utilities and Infrastructure (LSE: EGL) has a global mandate within its utility sector. Others, such as Law Debenture (LSE: LWDB) and Temple Bar (LSE: TMPL), have a UK focus, but with some international holdings.

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Tetragon Financial (LSE: TFGS) is one of the most exotic investment trusts on the London Stock Exchange, with a unique approach both to investing and corporate governance. Its total returns are virtually unmatched, which makes it interesting to review regardless of whether the latter will put one off. Since listing in April 2007, it has produced a total return on a net asset value (NAV) basis of 568%, compared to 276% for the MSCI All Country World index.

Tetragon was originally co-founded by hedge-fund managers Reade Griffith and Paddy Dear to invest in the then-booming collateralised debt obligation (CDO) market. In the aftermath of the global financial crisis, it reinvented its strategy and today invests across a wide range of asset classes. It is far more complex than most vehicles of this kind (which tend to be just a listed feeder fund into a main hedge fund) and so it is simplest to start with a breakdown of the portfolio.

At the end of September, Tetragon had net assets of $3.9 billion, plus about $600 million of debt, resulting in gross assets of just under $4.5 billion. The largest part of the portfolio ($2 billion or 44%) consisted of full- or part-ownership of specialist asset managers through a business called TFG Asset Management. A controlling stake in Equitix, an infrastructure investor, is the single biggest asset, at more than 25% of the entire portfolio.

Equitix was founded in 2007 and Tetragon invested in 2015, since when assets under management have grown tenfold. Tetragon recently sold a 16% stake at a large mark-up to its carrying value. In total, managers owned or co-owned by TFG Asset Management run $41.5 billion in capital. Equitix, BGO (real estate) and LCM (leveraged loans) account for the majority of this sum.

The rest of the portfolio is in a range of different investment strategies: $1.33 billion in private equity and venture capital, $570 million in hedge funds, $310 million in equities and credit, $120 million in real estate, $100 million in bank loans and $60 million in “legal assets” (investments related to litigation finance). Some of this (22% of the total portfolio) is direct investments and some (6%) is in external funds. However, the largest share (31%) is invested in funds run by the same managers that Tetragon owns.

So in essence, Tetragon’s core strategy is to find attractive asset classes, identify managers who deliver strong returns in them, and then invest in the growth of these managers as well investing directly in their strategies.

Tetragon Financial's governance shortfall

If that takes some time to get your head around, so does the governance. Tetragon has a primary listing in Amsterdam and a secondary listing in London, with both dollar-priced and sterling-priced shares. These are non-voting shares and the only voting shares are held by a company controlled by Griffith and Dear, so the founders hold all the cards.

Even though Tetragon owns investment managers, it has an external manager called Tetragon Financial Management, which is also controlled by Griffith and Dear. The fee structure under this arrangement leaves much to be desired: an annual management fee of 1.5% plus a quarterly performance fee of 25% over its hurdle rate (three-month US interest rates plus 2.75%) with no high-water marks.

These shortcomings are probably why Tetragon trades at a persistent discount to NAV (currently 55%). The only mitigating factor is that insider ownership still creates alignment between Tetragon and its shareholders. As of June, more than 38% of the shares were owned by Griffith, Dear and employees. That provides some incentive to achieve the best results for all shareholders.

The shares have returned 385% since inception, which is less than the NAV return (because the discount has widened since it floated), but still very strong. There’s a modest annual dividend of $0.44 per share (yielding 2.3%), but $570m of share buybacks over the past 10 years has reduced the number of shares outstanding by 13%.

This is not an trust that will appeal to most investors. Anybody tempted to buy will need consider it at far greater length than there is space to do here. Still, it is hard to argue with its historic performance.

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“There is a great deal of ruin in a nation,” wrote the economist Adam Smith, meaning that a successful country can withstand a lot of mistakes and incompetence before it is destroyed. He did not, of course, intend it as an open invitation to politicians to try their worst. That point appears to have been lost on every British government of the past decade.

The latest Budget is a deeply dispiriting one: anti-growth, anti-optimism and anti-investing, as Andrew, Kalpana and I discuss on the new MoneyWeek Talks podcast. It goes without saying that there was nothing to alleviate growing fears of long-term economic decline. What felt like a new low was the undermining, for no obvious reason, of things that still work.

The reversal of much of the ISA flexibility brought in just a decade ago. The slashing of tax relief on venture capital trusts at a time when fundraising has been weak. The cap on salary sacrifice for pension contributions. These were accompanied by pointless ideas such as the three-year break from stamp duty for new initial public offerings (IPO), which will do nothing to revive the increasingly moribund London Stock Exchange. All suggest a chancellor and a Treasury who have no clue what they are trying to achieve.

Hidden opportunities in Britain's stock market

Still, the level of pessimism about Britain and the lethargy of the stock market probably increases the extent to which opportunities can keep hiding in plain sight. Take investment trusts. There are several sectors that trade at yawning discounts to net asset value (NAV), including infrastructure, renewable energy, private equity, real estate and various niche strategies. In some cases, these discounts will be justified – reported NAVs will not be realistic and we see this when funds take huge write-downs as they wind down and try to sell assets. Yet in other cases, we see funds carrying out sales near their carrying value or better, which helps to validate NAVs. Overall, there is a substantial amount of mispricing, with not enough investors to do all the hard work.

This situation will not persist indefinitely. Where assets are worth more than their market price, they will be taken out by specialists. These are one-time gains, and the market will shrink as they are snapped up, which is not good for the long-term health of London. But as investors we can only take what chances we are given.

More attention from activists will help speed this process along, so it’s worth taking a look at MIGO Opportunities Trust (LSE: MIGO), one of a handful of funds that invest in other closed-ended funds. Under Charlotte Cuthbertson and Tom Treanor of Asset Value Investors, the trust’s strategy is shifting towards a more concentrated portfolio and greater engagement to unlock value. At £75 million in assets, it can take meaningful positions in small targets and will have limited overlap with AVI Global Trust (LSE: AGT), its £1.3 billion stablemate. This makes it an obvious way to capitalise on some of the market’s blind spots.

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What happened at the Autumn Budget?

Taxes are up – a lot: another £26 billion a year by 2029, drawing millions more into higher tax bands. That’s almost as big as the £32 billion raised in last autumn’s Budget, with its job-destroying increase on employers’ national insurance contributions. Spending is going up, as a political choice, as is borrowing. Thanks to the higher taxes, fiscal headroom will double to £22 billion – this is the amount by which government can increase spending or cut taxes without breaking its own fiscal rules, in this case, to have national debt falling as a percentage of GDP within five years.

Most of the spending increases will happen up front, while the tough fiscal consolidation (threshold freezes, other tax rises and spending restraint) is pencilled in for the future. Reeves’s choices mean that tax as a fraction of national income is now expected to be a full percentage point of GDP higher than forecast in March, at 38%. That’s an all-time high and five percentage points higher than in 2019.

Did the Budget contain any good news?

Increasing fiscal headroom is a “sensible move for which the chancellor deserves credit”, say economists at the Institute for Fiscal Studies. “By providing greater insulation against economic turbulence, the additional buffer will reduce the risk of playing out this year on repeat in 2026.” Even so, that £22 billion is judged by the Office for Budget Responsibility (the government’s own fiscal watchdog) to be small compared with the uncertainties in the economic outlook. Moreover, it is only 75% of what her predecessors, on average, thought prudent.

There were some other good things, says William Hague in The Times: an increase on limits for investing through venture capital trusts and the enterprise investment scheme, an expansion of the number of companies eligible for share-option schemes for employees; promoting innovation in government procurement; increasing the annual budgets for UK Research and Innovation through to 2030, and mooted improvements in the regulation of the nuclear industry.

Will the Budget boost growth?

Not according to the OBR, no. The watchdog, for all its sparring with the Labour government, actually rode to Reeves’s rescue with a surprisingly upbeat forecast of higher tax revenues driven by higher wages and employment. Yet in their economists’ judgement, none of the policy measures announced in the Budget had a “sufficiently material impact” to justify changing its growth forecast.

The OBR upgraded its GDP growth prediction for the current year to 1.5%, but cut its expectation for the remainder of its five-year forecast. The watchdog now thinks growth will be 1.5% in 2029, below its previous prediction in March of 1.8%. Its overall forecast, averaging 1.5% for the next few years, is better than the 1.2% average since 2008, but far too weak to be transformative.

Does it mean the Budget will harm growth?

The OBR could be wrong, of course. Economic forecasts are famously a mug’s game and the OBR’s are no exception. And Reeves’s speech included some high-flown rhetoric about growth and business. But the prosaic reality is of a directionless and floundering government that is raising taxes to prioritise welfare spending – and appease Labour’s disillusioned backbenchers – at the expense of enterprise, supply-side reform and growth.

What’s more, notwithstanding the relatively sanguine reaction in financial markets (including gilts), the Budget as a whole lacks credibility, according to the Institute for Fiscal Studies. “The additional spending and borrowing in the short term is readily believable. The future restraint, just before the next election? One could be forgiven for treating that with a healthy dose of scepticism.”

What are the damaging measures?

The extra three-year freeze to personal tax thresholds, paired with a surcharge on high-value properties and increases to income-tax rates on property, savings and dividends, all “risk undermining a significant portion of the tax base by pushing more affluent and mobile taxpayers abroad”, says the Financial Times. The ill-judged plan to raise £4.7 billion by curbing pension salary-sacrifice reliefs will penalise savers, raise employers’ costs and damage work, investment and confidence. A steep rise in minimum wages next April will layer on further costs for businesses and weaken hiring incentives.

And the Budget leaves the UK on an ever-upward trajectory of government debt. According to the OBR, its measures means that UK debt will rise to 95% of GDP this year and end the decade at 96% of GDP, which “is two percentage points higher than projected in March and twice the debt level of the average advanced economy”.

Any reasons to be cheerful?

The most “depressing” thing, says Martin Wolf in the Financial Times, is the lack of any meaningful pro-growth agenda. It is bizarre, and ominous, that even a “government with a huge majority dares to do so little to transform economic prospects”. The optimistic view, says David Smith in The Sunday Times, is that if the chancellor (as she hopes) has finally delivered the stability promised, then this will bring benefits. “Financial markets will no longer be constantly on edge and businesses will have the confidence to invest (though the OBR revised down its business investment forecasts).” Consumers could regain the confidence to spend, helped by lower interest rates.

But that’s a lot of ifs. Labour’s “soak the rich” approach is not the way to drive growth, says Ambrose Evans-Pritchard in The Telegraph. It deserves credit for “ending the long and lamentable failure of the British state to invest in infrastructure” – pushing up public investment to 2.6% of GDP from the long run average of 1.6% – and it’s possible a productivity boost from AI will lift the UK’s growth rate and public finances in the coming years. But will Labour still be around to reap the rewards? You wouldn’t bet on it.

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Listed real estate investment trusts (REITs) are starting to get their mojo back. Nowhere is this more apparent than in the office sector. In the immediate years following the pandemic, office values across the UK struggled as investors tried to grapple with the future of work and the implications for office buildings. However, over the past 24 months, the return to offices has accelerated and supply is struggling to keep pace with demand.

Total returns – ie, including rents and valuation – for the UK office sector were 2.7% in 2024, according to real-estate firm CBRE. That lags the overall return for UK commercial property at 7.7%, but there are growing signs of momentum. Take-up of office space across the UK reached 20.3 million square feet in the second quarter of 2025, the highest rolling 12-month level since the third quarter of 2022.

Market dynamics suggest some level of hoarding. Between 2019 and 2024, the number of people employed in office jobs is estimated to have increased by 2.4%, while occupied office space has decreased by 1.3%. Space per person has fallen by around 20%. To restore office space to 2019 levels, companies in London would have to acquire 39 million sq ft more space, reckons CBRE.

To put that into perspective, 1 Undershaft – currently the largest office tower under construction in the City of London – will provide just 1.7 million sq ft of office space across 73 floors.

The lack of space, coupled with a growing desire for remote working, means there’s a rising demand for flexible workspaces. Demand for this space has surpassed pre-Covid levels by more than 200%, according to Savills. This market was dominated by the likes of Regus (part of IWG) until WeWork disrupted the market. WeWork’s model failed, but it’s left a lasting legacy. A fifth of London’s offices are expected to be co-working sites by as early as 2030, according to CBRE.

Workspace's new strategy is working

This brings us to Workspace (LSE: WKP), whose portfolio comprises approximately 4.2 million sq ft of flexible work space in more than 60 properties in London and the South East, renting to over 4,000 customers. The group was founded in 1987, grew through acquisitions, and nearly collapsed due to excessive debt during the 2008 financial crisis. However, the near-death experience taught the company a valuable lesson: do not underestimate the value of having unleveraged freehold property (something WeWork overlooked). Workspaces’s loan-to-value (LTV) ratio is around 35% and is projected to fall to 30% by the end of the decade, according to Berenberg.

The share price took a hit last week when it said that uncertainty around the Budget has led businesses to delay leasing decisions – a theme echoed by other REITs – as well as reporting a first-half loss on the basis of falling valuations. Occupancy at the end of September was close to 80%, which is the crunch point for the group. Historically, rents have started to come under pressure at this level.

However, Workspace is now implementing a “fix, accelerate and scale” strategy under Lawrence Hutchings, the new CEO who joined from Capital & Regional in November 2024. The overarching goal of the new strategy is to sell underperforming assets, upgrade existing assets, keep leverage low and return cash to investors. Last quarter, the group completed £52.4 million of disposals against a £200 million target, at an aggregate discount of 1.6% to recorded value. Berenberg forecasts Workspace will have net tangible asset value (NTAV) of 754p per share for the 2026 fiscal year, suggesting the REIT is trading at a near-50% discount to the value of its property given the current share price of 362p.

This appears unwarranted. The fundamentals of the office market, particularly in and around London, remain robust, and Workspace has laid out a clear strategy to unlock value.

Workspace Group debt

Still, one cloud hanging over the group is the cost of debt. REITs are required to distribute 90% of their net property rental income to shareholders to maintain their Reit tax benefits. That can put pressure on cash flow if other costs, such as capital expenditure (capex) and interest charges, rise. More than one Reit has fallen foul of these restrictions in the past and has either been forced to borrow more or sell assets to fill the gap.

Workspace has 82% of its debt on fixed or hedged rates, with the average interest rate on this being 3.3%. However, 75% of Workspace’s fixed-rate debt is set to mature in the next three years. There’s only one other REIT (New River REIT) that has a higher volume of debt maturities over the same period. As debt is likely to be refinanced at higher rates, the cost of financing is expected to increase by nearly 30% by the end of the decade.

Still, rental income growth is expected to offset most of this growth, with interest coverage falling to a low of 2.6 times in 2028 before rising to 2.8 times in 2029. Disposals will cover most of the cost of refurbishing old assets and additional capex, meaning debt shouldn’t increase materially from current levels. So the changes shouldn’t force a material change to the strategy.

That would be good news for Workspace’s dividend. The stock currently yields just shy of 8%, which is one of the most attractive yields in the UK Reit sector. So Workspace has all the hallmarks of a traditional value play. It’s trading at a near 50% discount to the value of its underlying assets, offers a market-beating dividend yield and is suffering from cyclical, not structural headwinds.

There’s little to no financing risk. In the worst-case scenario, the balance sheet is full of freehold property. As the REIT works through its near-term issues, there’s scope for decent upside from current levels. Investors will be paid to wait.

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The stock market setback in 2022 was especially painful for investors in investment companies because many trusts also saw a sharp widening in their discount to net asset value (NAV). Starting from an average in the low single digits, discounts had reached mid double-digits by the end of the year, then grew further to nearly 19% by late 2023. Markets have recovered strongly since then and continue to rise. Yet discounts have only narrowed to 14% on average, and remain much wider in other sub-sectors.

This has had serious consequences for the sector. The wealth managers and private investors who sold during the fall in 2022 or in the subsequent recovery have barely returned. Share issuance has dried up almost completely, both for existing trusts and new ones. Trusts have been wound up or merged. Activist investors have moved in, claiming – with justification, in some cases – that underlying returns had been poor.

Some trusts had lost their way. Others were in an out-of-favour sector, such as infrastructure, private equity or healthcare. Still more have struggled to keep up with markets – when small- and mid-cap stocks outperform, they are often a tailwind for many generalist funds that have higher exposure to smaller stocks than the index does, but the recent dominance of a narrow range of US mega-caps has reversed this effect. Finally, UK investors have continued to sell UK shares – both investment companies and trading companies – even as the market has risen.

The optimism of a few years earlier has given way to talk of an “existential crisis”. Investors are put off by the compounding effect of widening discounts, poor liquidity and weak performance. Valuations of unquoted assets and property are treated with deep suspicion. Trust directors are accused of being asleep at the wheel, with aggressive buybacks failing to reduce discounts. Yet amid the deep pessimism, it’s worth noting that old hands have heard it all before.

A crisis period for investment trusts

Fifty years ago, the sector was in deep crisis. January 1975 marked the depths of the two-year bear market that saw UK shares fall 70% in nominal terms and 80% in real terms. Trust discounts peaked at more than 40%. They narrowed as the market rebounded, but remained at around 25% for the next 10 years. After Foreign & Colonial (now F&C), the first investment trust, launched in 1868, private investors remained the backbone of the sector until the mid 1960s. There were regular new launches and the sector generally traded at a premium to NAV. However, they then started to abandon the market as a result of inflation, bear markets, poor relative performance as discounts rose, and a growing preference for life-insurance products with favourable tax treatment and unit trusts that traded at NAV.

Investment trusts had huge disadvantages for the private investor. There were no individual savings accounts (ISAs) or self-invested personal pensions (SIPPs) to protect them from income and capital gains tax, at higher rates than now. Stamp duty was 2%. Private investors had to pay commission to a stockbroker of 1.65%, both for buying and selling, unless they were dealing in large sizes. The bid-offer spread was only available when the broker walked onto the floor of the stock exchange and asked a “jobber” (market maker) for a bid and offer.

A trust could borrow to invest, but interest rates were prohibitively high. Share buybacks were illegal under section 54 of the 1948 Companies Act, as was paying dividends from capital. Accumulated revenue reserves could be distributed, but otherwise dividends were limited to earnings, with all costs, including interest and all management fees, expensed. Boards were self-selecting oligarchies, often in cahoots with the managers and serving indefinite terms. Communication with investors was limited to the annual and interim reports and accounts. There were no fact sheets, and brokers’ research was limited to professional investors. Opportunities to meet, see or hear the managers were almost non-existent.

Thanks to exchange controls, investment was heavily weighted to Britain: UK equity exposure was nearly 50% in 1975 and rose to above 60% in 1980 as markets, especially in the UK, recovered. Exchange controls were abolished in 1979 leading trusts to invest more overseas, but this was a time when the UK was outperforming overseas markets, so this diversification was not adding value.

The turning point for investment trusts

Yet by 1981, there were signs of recovery. “The tide for investment trusts has turned and the climate has changed dramatically for the better,” wrote Robin Angus of Wood Mackenzie. “Most world markets have made considerable progress; greater specialisation within the sector has been on offer and capital gains tax reform has increased the appeal of trusts to professional funds. Average discounts remain nearly 30% but prices have yet to reflect the success of international diversification.”

During the previous year there had been six takeovers, eight conversions into unit trusts and six other trust removals. Against that, there were 10 new issues, five rights issues and 13 changes of investment policy. The move to specialisation, mostly via new issues, resulted in four oil and energy trusts, three investing in Japan, three in technology and biotechnology and three in UK smaller companies.

As private investment declined, pension funds and insurance companies bought into the sector and became the dominant holders, seeing it as a cheap way into the equity market. Yet a new threat had appeared.

Corporate financiers had invented the trick of getting their clients to bid for investment trusts at a discount as a disguised rights issue. This led to Robert Maxwell taking over the Bishopsgate Investment Trust and to the British Coal Pension Fund launching a successful hostile bid for the £1.1 billion Globe Investment Trust, the largest in the sector. Such bids and liquidations were “killing the goose which lays the golden egg”, said Angus. “A once-and-for-all gain may be desirable and substantial but it can never be repeated.”

As to discounts, there would be “a fairer ground for criticism if discounts were something new”, he wrote. “They provide endless opportunities for the shrewd investor to make money by switching in and out. At best, one can gear up one’s gains if one has the good fortune to spot a winner at an early stage.” The problem was one of performance, not over-supply. “An unattractive trust will sell at a bigger discount no matter how drastically the number of shares is reduced overall, while an attractive trust will sell at a small discount or even a premium.”

A better future for investment trusts

Angus passed away in 2022, but were he still with us, he would surely see many similarities between then and now. He would recognise – but have little time for – the “death list mentality with regard to the future of the industry”. He would observe that strongly performing trusts were mostly trading at a small discount or at a premium, and point out that apparent poor performance had been exacerbated by trusts trading at NAV four years ago. He would surely note how much trust governance has improved, applaud share buybacks and approve of the current dividend flexibility. And he would probably regard the last few years as a period of creative destruction for the sector and note, again, how the tide had turned.

Investment trusts face a better future. Liquidations, mergers and buybacks will give way to net issuance as discounts decline and premiums become more common. Still, net issuance has a historic tendency to be focused in the wrong areas; split-capital trusts, insurance-underwriting trusts, hedge fund-like trusts and renewable-energy trusts. Investors will need to beware of such crazes, which usually end in tears.

“The lesson of the last few years for trusts is that you have to get on the front foot and tell your story,” says Ed Warner, chair of HarbourVest Global Private Equity. This is true. At the same time, the lesson for investors, as in 1981, is not to wait for a better investment opportunity. It may never come.

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The board of Edinburgh Worldwide (EWIT) has issued a circular urging its shareholders to vote against proposals from New York-based activist investor Saba Capital.

On 27 November, Saba wrote to the board of Edinburgh Worldwide (LON:EWI) to requisition a general meeting with the intent of replacing the investment trust’s board with three independent directors that Saba has selected.

Saba later confirmed that its preferred directors would be:

• Gabi Gliksberg, founder and managing partner of ATG Capital Management;
• Michael Joseph, portfolio manager and deputy chief investment officer at Stansberry Asset Management and author of A Dollar for Fifty Cents: Proven Strategies to Outperform the Market with Closed-End Funds;
• Jassen Trenkow, a former finance and banking executive who previously held senior positions at Barclays and Goldman Sachs Asset Management. According to Trenkow’s LinkedIn profile, he was most recently chief operating officer at Allied Express Group.

The meeting has been scheduled for 20 January 2026.

On 23 December, EWIT issued a circular confirming the date of the meeting and urging shareholders to vote against Saba’s proposals.

“For the second time inside a year, Saba, a US hedge fund manager, has launched an assault on your investment trust by seeking to remove your entire independent Board and replace it with three US-based nominees of its own choosing, effectively handing control of your company to Saba,” said Jonathan Simpson-Dent, chair of Edinburgh Worldwide, in a letter attached to the circular.

Simpson-Dent also claimed that EWIT has attempted to engage constructively with Saba since shareholders voted down a similar attempt in February 2025, “proposing options that would have offered liquidity and choice to all shareholders”.

“Saba has been quick to reject all of these,” said Simpson-Dent.

Why is Saba trying to displace Edinburgh Worldwide’s board?

EWIT was among seven investment trusts in which Saba saw an opportunity to gain greater control in December 2024. The activist investor requisitioned general meetings at all seven during the opening months of 2025, with the aim of replacing the boards of directors with new appointments, including two of its own directors.

Saba cited persistent share price underperformance and alarming discounts to net asset value (NAV) in its attempt to displace the trusts’ boards.

All seven investment trusts voted against Saba, meaning its attempt was unsuccessful.

But Saba has now revived its interest, at least in Edinburgh Worldwide.

“We remain profoundly frustrated by the Board's prolonged inertia, especially given the decisive actions taken by the boards of several other UK investment trusts to increase share prices and narrow persistent discounts to NAV,” said Boaz Weinstein, founder and chief investment officer of Saba Capital, in the 27 November letter to Edinburgh Worldwide’s board.

“We will requisition a general meeting of the Company to remove the entire incumbent Board and, in its place, appoint a new board composed solely of qualified, independent directors who are committed to delivering long-term value for all shareholders,” Weinstein continued.

In a letter sent on 2 December, Simpson-Dent implied that Saba is acting in its own interests rather than those of EWIT’s shareholders more generally and that the hedge fund had not engaged with the board’s attempts to understand its objectives and propose a solution.

These solutions included a proposed merger with Baillie Gifford US Growth Trust (LON:USA), but Saba opposed the move. Given Saba owns 29% of USA shares and 30% of EWIT’s, the merger will not be able to proceed without its approval.

“Saba's lack of support suggests to us that their agenda is to take control of the Company for their own commercial gain at the expense of the remaining 70% of shareholders,” said Simpson-Dent.

Saba responded with a statement saying: “By pushing for a merger that benefits Baillie Gifford rather than shareholders, EWI’s Board has confirmed where its loyalties truly lie. Shareholders deserve a Board that puts them first – not another cosy deal that entrenches an unaccountable manager.”

AIC: it is vital that shareholders vote

When Saba attempted to replace the boards of Edinburgh Worldwide and six other investment trusts early this year, the proposals were defeated by surprisingly large numbers of shareholders turning out to exercise their shareholder voting rights.

The AIC has called for shareholders in Edinburgh Worldwide to once again ensure their voices are heard when Saba’s proposals are voted on.

“It is vital that shareholders vote their shares,” said Richard Stone, CEO of the AIC. “Saba’s proposals to replace the entire board of Edinburgh Worldwide Investment Trust could radically change the company and it is important that all shareholders’ voices are heard.”

Stone highlighted that shareholders can vote their shares via investment platforms like Hargreaves Lansdown, Interactive Investor and AJ Bell, or ask their financial adviser for help.

Shareholders voting through an investment platform will need to cast their votes ahead of the general meeting. The deadline to vote will vary depending on the platform, but EWIT has warned that some will have a deadline as early as 12 January 2026.

Information on how to vote and attend general meetings is available via the AIC website.

Renewable energy trusts were already struggling before the government decided to kneecap them at the end of October. In a major shock, it has launched a consultation on changing the inflation linkage on the subsidies they receive from the retail price index (RPI) to the consumer price index (CPI) in April 2026, three years sooner than expected.

Even worse, the government has floated a second, complex option that would backdate the switch to 2002. This may have been thrown in mainly to make a April 2026 change sound like a concession, but if actually implemented could reduce the income received by generators by billions of pounds over the coming years. The market reacted accordingly and the sector as a whole lost about 5% of its market value on the day.

Why is the renewable energy trusts industry struggling?

The proposals have created yet another cloud of uncertainty over a sector that was already unloved by investors. The industry has been caught in a “perfect storm” and is ill-equipped to deal with its current challenges, says Pietro Nicholls of RM Funds, an activist that has been battling battery-storage fund Gore Street Energy Storage Fund (LSE: GSF). Many of the trusts’ boards lack the experience required to address these problems, he argues. So instead, they’ve turned to easy ideas such as share buybacks.

Part of the problem is uncertainty over reported net asset values (NAVs). “An infrastructure or renewable investment trust NAV calculation is generally based on a number of different asset-specific (eg, output, power prices or project cash flows) and macro (eg, inflation or foreign exchange rate) assumptions, with individual trusts using different inputs to calculate the NAV value,” says Ashley Thomas of broker Winterflood. For example, if Greencoat UK Wind (LSE: UKW) were to use the same power price assumptions as Renewables Infrastructure Group (LSE: TRIG), its NAV would be lower than currently reported, estimates Winterflood. Since these are just assumptions, it is hard to say which numbers are more appropriate, but with so many variables, NAVs are undoubtedly highly subjective and volatile. Across the sector over the past 18 months, NAV changes have ranged from +8% to -7%, says Winterflood.

Feuding with renewable energy trust managers

It is regrettable that many managers were paid fees based on a percentage of NAV rather than performance. This became increasingly controversial once shares traded far below NAV. In the past year, many trusts have belatedly shifted to levying fees on a 50/50 mix of NAV and market value (or in UKW’s case, entirely on market value). Dealings with managers are becoming a common point of contention. Take Aquila European Renewables (LSE: AERI), which has agreed to sell assets to another fund advised by Aquila at a large discount to the current NAV, says Nicholls. How can the same manager assign two different values to the same assets? Or take a plan by Bluefield Solar Income Fund (LSE: BSIF) to merge with its manager, saying this would make to easier to invest in new projects. The trust has instead put itself up for sale after a backlash. Or just this week, TRIG has said it will merge with HICL Infrastructure (LSE: HICL), run by the same manager.

These developments show a lack of concern for investors, says Nicholls, which is clouding the real value of the assets. “If boards were more respectful of shareholders, the share prices would be a lot higher.”

It isn’t clear what it will take to shift sentiment towards the sector. The government’s consultation certainly won’t help. Still, there needs to be a substantial change in the way these trusts are run, with a primary focus on the interests of shareholders. Only then can investors begin to trust NAVs are what managers say they are.

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Which area of commerce has grown almost twice as quickly as the global economy over the past 50 years – and is set to continue to do so? The answer is air travel. The International Air Transport Association (IATA) reveals that growth in commercial air travel, as measured by passenger miles, has outstripped global economic expansion by a factor of 1.7 since the 1970s, despite shocks such as the 9/11 terrorist attack on New York, the global financial crisis and Covid. IATA predicts growth of 3.4% a year over the next 15 years.

If that record and outlook doesn’t pique investors’ interest, perhaps estimates of the need for 42,000 new aircraft globally over the next 20 years will get their attention. The airline sector is at least 2,000 aeroplanes short of the total fleet size it needs, says the consultant McKinsey: manufacturers slowed production during Covid and have not caught up. The market is thought likely to remain undersupplied for a decade, according to Greg Belonogoff, a principal at AB CarVal, owned by the investment manager AllianceBernstein.

That might suggest investing in aircraft manufacturers, of which there are only really two global players, Europe’s Airbus and Boeing in the US. But there is a potentially more interesting – and wide-ranging – opportunity. McKinsey’s analysis suggests investments in aircraft leasing have consistently outperformed in recent years.

Most airlines these days prefer to lease new aeroplanes as they maintain and expand their fleets, rather than buying them outright. The latter option ties up too much balance-sheet funding in businesses that want to focus on operations, rather than large capital investments. Accordingly, aircraft leasing finance is now a fast-growing asset class.

Investing in aircraft leasing offers a stable income

From investors’ perspective, aircraft financing is a relatively simple concept. A leasing company raises money through a combination of equity – selling its shares to investors – and debt from a finance provider such as a bank. The company uses this money to buy aircraft, which can then be leased to airlines.

Over the term of the lease, some of the income the firm receives from the airline covers the cost of debt repayments – finance is usually “amortised”, meaning the lessor makes both interest and capital payments. What’s left of the lease income can then be used to fund regular and predictable distributions to shareholders.

Debt repayments are structured so that by the end of the lease, the lessor will usually own the aircraft outright. It can then try to re-lease the aircraft – to the same airline or one of its peers; or more typically, it can sell the aircraft on the second-hand market, with the proceeds distributed to investors.

As a result, investors in aircraft-leasing vehicles can look forward to regular, stable and often generous income payments, as well as a capital return later on. It’s an alluring mix of returns, all backed by a physical asset in the form of the aircraft.

“Think of aircraft leasing as being a bit like property with wings,” says Matthew Hose, a senior vice president at the investment bank Jefferies. “You’re earning an income from a physical asset, and when you’re ready, you’ll be able to generate a capital return too by selling the asset.”

One other attractive feature of this asset class is its low correlation with other assets that investors will have in their portfolios. Returns move almost entirely independently of what’s happening on global stock markets, for example, but there is also little connection with the investment performance of other alternative assets, such as infrastructure and property. That makes aircraft leasing particularly valuable as a tool for managing risk. It provides investors with a means to achieve genuine diversification in their portfolios.

“Even when markets are volatile, the aircraft leasing sector is more or less stable,” says Belonogoff. “If you go back to the drama around Liberation Day back in April, the airline stocks saw some sharp sell-offs, but the listed aviation lessors just carried on; in our view, the uncorrelated nature of these assets is very attractive and has proved itself over several decades.”

The aircraft leasing sector is far from foolproof

That’s not to suggest this is a risk-free investment. Airlines can – and do – go bust, in which case they will default on the lease. Failures can leave the lessor scrambling to find a new airline to rent its aeroplanes, while trying to stay on top of its debt repayments. It may be forced to sell the aeroplane to keep its lenders happy, with no guarantees about the price it will get, particularly as the sort of climate in which airlines go bust is the sort of climate that isn’t supportive of the value of aircraft in the second-hand market.

“The key for lessors is to balance assets and liabilities very carefully,” says Hose. “Ideally, they want to lease to high-quality airlines with strong finances, but the quality of the asset – the aircraft – is understandably important too.” One debate for lessors is whether to concentrate on the really large wide-bodied aircraft, which cost more and where shortages are particularly acute, or on narrow-body aeroplanes, where the market is more liquid.

Similarly, investors can’t rely on a significant payday at the end of the investment cycle; that will depend on the state of the second-hand market at the time the fund is trying to sell its aircraft. Right now, the market looks healthy, with airlines desperate to get their hands on more aeroplanes to meet increasing demand from passengers. But the lesson of recent times is that a shock to the global travel sector is always possible. Even an economic slowdown might reduce demand, and thus the value of aeroplanes.

Movements in interest rates can also affect returns. Higher debt costs will mean less lease income to pass on to investors, even if airlines can be made to share in the pain. Some lessors also take on mezzanine debt, which isn’t repaid during the lease’s lifetime; that borrowing must be repaid from aircraft sales before the proceeds are made available to investors.

Nevertheless, this is an asset class with an enduring long-term appeal. “After all the big shocks to the system, demand has come back and we’ve kept moving forward,” says Belonogoff. Rising demand “means we need more aircraft coming into the industry and that requires more financing; lessors are also playing a bigger role because most airlines are moving away from owning their aircraft to leasing them”.

Investment opportunities in aircraft leasing – where to look now

One way to get exposure is to buy shares in aircraft leasing companies. It’s not a huge sector of stocks, but does include US-listed AerCap (NYSE: AER), the world’s largest aircraft lessor. BOC Aviation (Hong Kong: 2588) is Asia’s number-one player, while European aircraft leasing companies include Avation (LSE: AVAP) of the UK. Dublin remains the world’s biggest centre of aircraft finance, with most public and privately owned lessors maintaining a presence in the Irish capital.

Investing this way isn’t pure-play aviation finance: investors are buying equities rather than the underlying asset class, so they may not get all the diversification benefits that the latter offers. But shares in these firms do act as a proxy for aviation finance.

An alternative is the investment-trust industry, through which a number of investment managers have sought to democratise aviation finance in recent years. There are currently three funds to choose from, though Doric Nimrod Air Three (LSE: DNA3), the oldest of the three, is nearing the end of its life. It is due to liquidate during the first half of 2026, having recently sold its four aircraft to Emirates for $180 million.

Elsewhere, DP Aircraft 1 (LSE: DPA) was launched a few months after Doric Nimrod, in 2013, but ran into major problems during Covid, when Thai Airways and Norwegian Airlines, to which it had let its aeroplanes, both hit financial trouble. That saw the fund plunge in value, although it has recovered recently, particularly as Thai has emerged from bankruptcy.

The fund now owns two aeroplanes, both leased to Thai Airways until 2026, and has recently announced that these aircraft will be re-leased to Poland’s LOT Airlines for a further 12 years. It is in the process of renegotiating its financing arrangements, which will determine how much of the $168 million of payments it expects to earn from LOT will be available to distribute to investors.

The third aircraft leasing investment trust is Amedeo Air Four Plus (LSE: AA4). It is the largest such fund by some distance, but also the most complex. It owns eight aeroplanes leased to Emirates, with the leases due to expire between 2026 and 2028; the fund is widely expected to sell these aircraft to Emirates, with investors taking encouragement from Doric Nimrod’s recent deal with the airline, which was completed at an unexpectedly high price.

In addition, the fund owns four aircraft leased to Thai Airlines until 2035 and 2036. But these aren’t producing significant income for shareholders because the lease agreements were struck during Covid, when rates were under pressure. The income from these aeroplanes is therefore required to service the fund’s borrowings.

The additional complexity with Doric Nimrod is that it has a chunk of mezzanine debt that will eventually need to be repaid from aeroplane sales. That leaves it unclear whether investors will see a return of capital. Nevertheless, the fund has its supporters. For example, broker Panmure Liberum issued a buy recommendation earlier this year, setting a target price of 66p; the shares trade at 62p. “Second-hand aircraft market conditions remain positive,” says Panmure Liberum’s Gerald Khoo. Demand for travel “continues to grow, with demand resilient in the face of economic and geopolitical uncertainty and volatility”.

That might persuade more investment trusts to come to market in this sector. Some analysts expect to see more fund launches over the next year or so, particularly given current heightened demand for private assets. And that could be to investors’ benefit. “The aircraft-financing model is now a proven one,” says Jefferies’ Hose. “Lessors have shown they can execute on the model.” Retail investors just need more opportunities to take advantage.

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Terry Smith, CEO and chief investment officer of Fundsmith, has succumbed to pressure from activist investor Saba Capital and has proposed rolling the Smithson Investment Trust over into an open-ended fund in a bid to address its persistent discount.

Shares in Smithson Investment Trust (LON:SSON) gained over 7% on 12 November as the news broke.

The gains saw the investment trust’s discount to net asset value (NAV) narrow from around 9% to 2.7%. Smithson’s discount had been 9% or wider since June 2023.

"Whilst we firmly believe that applying Fundsmith’s investment strategy to small and mid-sized companies will achieve the objective of delivering investors with long term growth in value, the current investment trust structure does not guarantee that Smithson shareholders can realise their investment at NAV," said Smith.

"We therefore believe that transferring the assets to an OEIC structure is in the best interests of all Smithson shareholders, permanently removing the persistent discount," he added.

Saba Capital, an activist investor based in New York which previously attempted to replace the board of seven UK-based investment trusts, held an approximately 15% stake in Smithson and had been using this position to influence the trust’s board to address the discount.

“We launched this as an investment trust… but the problem is it hasn’t worked,” said Smith in an interview with Dan Coatsworth, head of markets, AJ Bell.

Smith “agreed with the activist investor that change was required” and said Saba had been the catalyst for making the change. The trust’s management had been attempting to narrow the trust’s discount by buying back 40% of its own shares, but that hadn’t narrowed the discount.

“It’s interesting to hear an asset manager agree with Saba, given how others on the receiving end of the activist’s campaigns have been less welcoming,” said Coatsworth.

What is the proposed Smithson conversion?

The proposal from Smithson is to convert the current investment trust into an open-ended fund that will maintain the same strategy and focus.

Smithson will offer shareholders the option of either withdrawing all their investments at close to NAV, or rolling their holdings into the new vehicle – dubbed “New Smithson”. New Smithson’s portfolio will continue to be managed by Simon Barnard and will stick to its strategy of long-term investments in global mid- and small-cap companies.

Smithson will make a “significant cost contribution” to ensure that investors exiting or rolling over their shares are able to do so at close to NAV.

Smithson Investment Trust intends to publish a circular including further details about the scheme, including timings of the general meetings at which shareholders will vote on the proposal, no later than 31 January 2026. It expects to have the scheme completed by 31 March.

Unlike closed-ended funds (i.e. investment trusts), open-ended funds can’t trade at a discount, or a premium, to their NAV.

There are possible downsides – fund managers can be forced to sell holdings in the event of a downturn.

But given the median company in the fund has a market cap of £8 billion, compared to the fund’s market cap of £2 billion, Smith told AJ Bell that this shouldn’t be an issue.

“If we thought there would be a liquidity problem we would not propose going into an OEIC,” said Smith.

Are investment trust discounts unusual?

Saba Capital has been using wide, persistent discounts to pressure investment trust managers into taking various corporate steps.

Initially, it failed to replace the boards of seven trusts that it targeted early in 2025 with its own appointees. Saba then shifted its strategy towards converting trusts into other types of fund.

But investment trust discounts are not uncommon – and many of the discounts in the trusts Saba has targeted, including Smithson, are similar to those of their peers.

Data from the Association of Investment Companies, an industry body that represents investment trusts, shows that the average discount across all investment companies as of 12 November (excluding 3i, which is so large as to distort the data) is -13.70%. The average discount for investment trusts in the global small cap sector is -9.4% (note that this figure comes after the narrowing of Smithson’s discount so would have been higher before news of the rollover broke).

Small caps are widely out of favour in the current market, Smith told Coatsworth. “The discount to NAV is prevalent across all strategies across the industry,” he added.

The combined market capitalisation of the Magnificent Seven group of US mega-cap stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – is now over $22 trillion, meaning these seven stocks make up about 37% of the S&P 500 and 23% of the MSCI World index. As a result, most investors are likely to be heavily invested in this handful of tech giants, which has worked well for the past five years. However, with the market looking increasingly frothy, it could be time to take some money off the table.

Mega-cap tech has sucked up capital at the expense of other businesses, meaning there are now some exciting opportunities appearing in corners of the market. STS Global Income & Growth Trust (LSE: STS) is one way to invest in these kinds of cheaper stocks and reduce exposure to more frothy areas of the market.

STS Global Income & Growth offers quality income

STS holds a fairly concentrated portfolio of between 28 and 34 names, selected for their predictability, resilience, quality and income potential. The strategy emphasises firms that have scope for persistent earnings and dividend growth, which should result in reduced volatility, say James Harries and Tomasz Boniek of Troy Asset Management, who have run it since early 2020. The same duo also run the Troy Global Income Strategy with a similar mandate, which has delivered an annualised volatility of 9.1% since its launch in 2016, compared with 11.2% for the MSCI World index.

The top holdings today are British American Tobacco (BATS) and CME Group. BATS offers the “unusual combination” of a high-quality business trading at an attractive valuation, says Harries. CME, the operator of the world’s largest futures and options exchange, is a high-quality firm that offers a 4% yield comprised of regular and special dividends. More recently, the managers have added Nike, purchasing it at a low point when it was “out of favour” due to strategic missteps and tariff trouble. The shares had fallen 71% from peak to trough, making it a classic quality value play.

The trust has a 33% weighting to the UK, an opportunistic allocation as “global investors have shunned the UK”. However, on a look-through, only 6% of sales come from this market. “So we’re not making a call on the UK economy at all, what we are doing is saying that we’re taking advantage of attractively valued global assets listed in the UK.”

STS Global Income & Growth: avoiding technology

Technology is just 10% of the portfolio – a conscious decision, as most tech companies don’t pay a dividend. However, the result is that STS has underperformed the market in recent years, with a net asset value (NAV) return of 36.3% versus 49.3% for its benchmark, the Lipper Equity Global Income index. Yet while the rest of the market is starting to look pricy, STS’s portfolio is anything but expensive. At the end of October, the trust’s holdings were trading at an average price-to-earnings (p/e) ratio of 18 compared with an average of 21 for the MSCI World. The estimated yield was 3% compared with the market’s 2%.

What’s more, Harries and Boniek have been able to fill the portfolio with quality names at low prices. The portfolio has an overall operating margin of 28% (compared with 14% for the market) and a return on capital of 16% (compared with 9% for the market). Quality names in the portfolio trading close to or at the bottom of the ten-year p/e range include the likes of Reckitt, Novartis, Roche, Unilever, Nestlé and Accenture.

Buying at “lower valuations means less volatility”, says Harries. With so many high-quality companies currently “out of favour for whatever reason”, the team has been able to “build asymmetry into the portfolio”. This means aiming for “limited downside and long-term decent upside”.

In a market that’s starting to look overexcited and overextended, STS offers an alternative for investors seeking quality, value and income. The trust is currently trading at a small discount to NAV and offers a dividend yield of around 3.5%.

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Sherman McCoy, the lead character in the 1987 book The Bonfire of the Vanities by Tom Wolfe, was described as a “master of the universe” due to his role as the highest-earning bond trader at his broker. In the 1980s, bond traders were the stars of Wall Street. Electronic trading was primitive and much trading depended on personal relationships as well as inside information. These inefficiencies allowed traders to extract super-normal profits across trades at a time when demand for credit was surging, driven by the growing mortgage debt and corporate bond markets, as well as the US government’s expanding fiscal deficit.

The growth of the credit markets also gave rise to the emergence of another sector: private equity. In the history of finance, the principle of the private company has been around far longer than stock markets and public companies. However, the world of private equity as we know it today really began to develop in the 1970s and 1980s, as financial markets matured and it became easier to assemble large sums of money to back deals.

The way the market developed through these formative decades illustrates how the industry operates. In the early days, private-equity companies were generally referred to as “leveraged buyout firms”. The label was appropriate. Most private-equity deals involve the buyer providing only a portion of the asking price with the remainder coming in the form of a loan from a single lender or a syndicate of banks. This loan is then refinanced with longer-term debt, secured by the assets of the acquired company and supported with its cash flow. The money on the equity side of the deal usually comes from funds managed by the buyout group.

The private-equity and buyout industry experienced exponential growth throughout the 1980s, driven by the surge in demand for corporate and high-yield bonds, largely facilitated by the high-profile financier Michael Milken. According to the US National Bureau of Economic Research, in 1990, private equity was a little-known niche, with $6.7 billion in investments. Today, according to McKinsey & Company, that number is closer to $5 trillion globally, or $11 trillion including venture capital – although as most assets are held in opaque offshore company structures, it’s impossible to assess the full scale of the industry. Here, we’ll be focusing mainly on the business of private equity in relation to private companies rather than private credit or venture capital, both of which should be considered as entirely different asset classes. Over the past decade, private-equity managers have become the new “masters of the universe” as fees have swelled and the industry’s influence on the wider economy has grown.

Private equity is very private

Over 20 years, private equity has generated a net annualised return of almost 13%, according to MSCI Private Capital Solutions. Alternative data from Preqin suggests the annualised gains from private equity over the past 15 years were 14%. But getting to the bottom of these returns isn’t straightforward. The industry likes to use a metric called the internal rate of return (IRR), which takes into account the cost of the return, cash flows received over the life of the asset, and value realised at the point of sale, all compared with the risk-free rate, usually a US Treasury bond. But as Ludovic Phalippou, a private-equity guru and professor of financial economics at the University of Oxford’s Saïd Business School, explains on the FT Alphaville blog, the IRR is a complex formula that assumes every dollar distributed is reinvested at the same rate it was earned. That’s generally impossible as the rate of return is heavily dependent on returns achieved in the first few years after the initial investment. As Phalippou says, “The complex mathematics mean that early cash flows dominate the calculation, while later ones have almost no impact. You can invest for 40 years, make or lose billions – and your IRR since inception will still reflect that nice exit in 1980 or whenever.” This “IRR stickiness” is “fertile ground for gaming”. Even without this “gaming”, IRR tends to be inflated due to the “survivorship factor” as strong early investment exits tend to outweigh losses by a substantial margin.

Then there’s the issue of fees. Private equity has attracted attention for its high fees over the years, an issue industry insiders have batted away, highlighting the returns investors have been able to achieve. This argument has weight. Buying and operating private businesses does require a lot of extra work, so comparing the fees with, say, a low-cost tracker fund doesn’t make much sense. Neither are these fees particularly demanding. Private-equity funds that were raising money in 2024 had mean management fees of 1.74% for buyouts and 1.93% for growth equity, says Prequin. Data from Callan shows that “secondaries” (funds buying stakes in other funds) typically charge more than diversified funds of funds, with management fees averaging 1.07% during the investment period.

However, according to research from Oxford University and Frankfurt School of Finance & Management, private-equity firms charged $20 billion of “hidden fees” to the almost 600 companies they owned, with a total value of $1.1 trillion. So-called “monitoring fees” and “transaction fees” were agreed by private-equity firms and companies acquired. Further research from Phalippou reveals that private-equity firms earned more than $1 trillion in so-called carried interest (a share of the profit of each investment sold) since the turn of the century.

Getting to the bottom of the total fees charged by private-equity funds and the resulting impact on returns can be tricky, to say the least. Large institutional investors don’t tend to disclose this data and private-equity firms have a vested interest in not revealing more than they have to. Private equity is, by its very nature, very private. One of the most revealing and recent studies was published at the end of 2024 by Cliffwater, a leading provider of proprietary research on private investments. It found that private-equity allocations by state pensions produced an 11.0% annualised return net of fees over the 23-year period ending 30 June 2023, outperforming the US total market index by 3.8 percentage points per annum.

How private-equity funds work

It is tempting to make judgements based on such headline figures, but the reality on the ground is very different. There are more than 30 notable private-equity firms, including well known names such as Blackstone, Carlyle, CVC, KKR, Bain Capital, Warburg Pincus, Lone Star Funds, Fortress, Ares Management, HarbourVest and Cinven. These firms manage separate funds. KKR, for example, currently lists 25 active funds in its 2025 annual report, as well as other core investment vehicles. Of these, the firm had achieved $207 billion in commitments, of which it had invested $160 billion; it had realised $159 billion via sales or IPOs; and had $90 billion remaining and $55 billion uncalled capital (money investors have pledged but KKR has yet to find a home for). KKR calculates it is owed $6.3 billion in carried interest on these investments.

It’s worth briefly looking at how private-equity funds usually work. A management firm, in this case KKR, sets up a fund as the leading or general partner (GP). The GP controls investment and divestment decisions and collects fees. It also has unlimited liability if the investment goes wrong. The GP goes out to investors to raise capital in the form of capital commitments. These are commitments to give the fund capital when called for. The investors, or limited partners (LPs), can retain “uncalled” capital, but must be ready to hand it over when the GP finds an investment opportunity. Generally speaking, these funds have limited lifespans of about five years. That means GPs look to buy, improve and sell businesses within this time frame. Capital is returned at the end of the fund’s life.

Every fund has a different mandate, investors, time frame and fee structure. Fees between funds can vary by as much as 400%, from 0.5% to 2.5%, according to a paper by Juliane Begenau and Emil N. Siriwardane in the Journal of Finance in 2024 (the paper looked at cash flows in LP funds covering $438 billion of investments made by 218 US public pensions in 2,400 private-market funds). Larger investors that had worked with GPs in the past were often handed more lucrative deals at the expense of smaller investors.

Secondaries and continuations

So far, we have looked at “vanilla” private-equity funds – the ones taking companies private and into the world of private equity in the first place. As the industry and the demand for exposure to private funds has grown, companies such as KKR and Blackstone have developed different vehicles and strategies to expand their portfolios. One such is the secondaries market. This refers to the buying and selling of existing stakes in private-equity funds during a fund’s lifetime, which can be handy if an LP wants to unlock cash in a hurry. This market has doubled since 2018, with the number of deals hitting $162 billion in 2024. The market is projected to reach $300 billion by 2030. As secondaries are often conducted as a way to raise cash in a hurry, they can offer access to assets, whether whole portfolios or individual companies, at a significant discount.

LPs can sell their holdings to other parties and so can GPs. However, these sales often take the form of a continuation vehicle. This market is nowhere near as developed as the LP-led secondary market, but it’s growing rapidly. Transaction volumes in the second half of 2024 topped $47 billion, up 44% year on year, according to Jefferies (the figure was $41 billion in the first half of 2025). When a GP sells an asset to a continuation vehicle, it’s essentially selling to a new fund. LPs can either choose to exit the old fund or roll over into the new fund. It’s not uncommon for the new fund to have an entirely different group of investors to the old fund.

Earlier this year private-equity group TDR Capital (owner of Asda) sold its majority stake in gyms group David Lloyd Leisure from its fund TDR Capital III to a new vehicle TDR Capital Titan for £2 billion. As the Financial Times reported at the time, of this total £1.2 billion was debt and most of the remaining investment (£800 million) was new, suggesting “that few investors in the original TDR fund chose to roll over their investments into the new vehicle”. Other large deals this year include Vista’s $5.6 billion fund to sell a large existing stake in IT firm Cloud Software Group to a newer fund it manages, while Inflexion sold stakes in four deals, including industrial company Aspen Pumps and Rosemont Pharmaceuticals, a UK pharma business, for £2.3 billion.

Managers have argued these funds allow them to hold onto assets for longer. If they own a great business, they argue, they shouldn’t have to sell at the end of a fund’s life. That’s a good argument, but there’s also growing concern these managers can’t find anyone else to buy the assets at the right valuation. Traditionally, private-equity funds offloaded assets onto public markets or other private-equity investors for a handsome return. However, as private-equity valuations have skyrocketed (with more money chasing deals) and the IPO market has dried up, it’s become harder and harder to offload assets at the desired price. Setting up continuation vehicles is one way to save face.

Dramatic shift in the private-equity industry

Most of the structures outlined above are designed primarily for large institutional or ultra-high-net-worth investors – billionaires and their family offices. Until recently, private equity was mostly off limits for the average investor, with the exception of a handful of listed vehicles, predominantly investment trusts listed on the London Stock Exchange. However, in the past two or three years there’s been a dramatic shift in the industry with the development of so-called evergreen semi-liquid funds. Unlike the traditional private-equity fund model, where capital is committed and locked up for multiple years, semi-liquid funds are open-ended, meaning investors can subscribe and redeem at regular intervals at the prevailing net asset value (NAV) of the fund, which has no fixed life. Portfolio managers construct the portfolio in such a way that investors can withdraw cash when required. That’s not particularly easy with private assets that are designed to be held for five years or more, but as money is currently flowing in the right direction, the strategy has yet to be tested.

Still, investors are flocking to the opportunity. Private-equity giant Carlyle recently reported in its third-quarter earnings that it had raised $3 billion via evergreen vehicles between July and the end of September, ten times more than the same period in 2023 (inflows into its strategies totalled $16.9 billion overall). Blackstone, one of the world’s largest private-equity firms, reported a 167% rise in fee-related income in the second quarter, primarily due to income from its eight evergreen vehicles. Apollo recorded $9 billion of inflows into its high-net-worth-client arm in the first half of the year, and has recently laid out plans to launch three new vehicles in addition to its 18 other strategies. Blackstone and Blue Owl have even turned to television advertising to get investors to join up; in the US, Bank of America now lets its wealthy clients invest directly in the strategies. Across the UK and Europe (where roughly 40% of flows originate), more than €88 billion had been invested by June this year, more than double the amount in early 2024, according to Novantigo.

However, there are growing questions over the suitability of these funds. Some reports have suggested big private-equity investors are taking advantage of this flood of capital to cash out their holdings at higher prices. Deals have helped prop up values in the secondaries market, which is far more flexible than the primary market and perfectly suited to the semi-liquid nature of evergreen funds. What’s more, fund managers can mark up the value of secondary deals to their NAV value after the purchase. As most secondary deals are stuck at discounts to NAV (often deep discounts in distressed markets), this can generate vast, instant paper gains. That also means evergreen funds can pay more. According to survey data from advisory firm Campbell Lutyens, evergreen vehicles paid on average 4% more last year for fund stakes than traditional buyers.

The potential for conflicts are rife in this market and it’s important to note the strategies haven’t been tested in a down market. The private-equity industry has generated fantastic returns for investors over the past few decades, but past performance should not be used as a guide to future growth. The success of semi-liquid funds depends on the continued outperformance of the industry and continued support of investors.

A different approach

If investors want to add exposure to private equity to a portfolio, consider instead listed investment trusts, the likes of HarbourVest Global Private Equity (LSE: HVPE), ICG Enterprise Trust (LSE: ICGT), Pantheon International (LSE: PIN), HgCapital Trust (LSE: HGT) and Oakley Capital Investments (LSE: OCI). Each of these trusts has its own approach, some of which have been more profitable than others over the past decade. HG Capital has the best record. Over the past decade it has returned 458% for investors, excluding dividends, and the shares are currently trading at an 11% discount to NAV. The trust leans on the expertise of its parent, HG Capital Europe’s largest private-equity software investor. The fund is currently invested in more than 55 small firms in areas such as business-to-business software, tech-enabled services and data providers, says Luke Finch of HG. “These are the kind of software companies that help SMEs and businesses run their operations. So it might be filing your accounts, paying your people… compliance, things like that.”

By sticking with these companies, HG is focusing on a market niche where there’s a strong prospective sales pipeline at the end of its ownership period. “On average, over the last three or four years, we’ve typically had realisation activity, either full sales, part sales, maybe refinancings, on about a third of our portfolio each year,” says Finch, and the average uplift on NAV for each business at the time of sale has been 20%. “What’s a business worth? It’s ultimately worth what someone’s willing to pay you for it. And that’s the acid test at the end of it.” Finch continues, “We take quite a conservative view on valuations within HG… Ultimately, we don’t get paid until we sell businesses. So carrying them at the wrong value isn’t helpful to anybody.” This approach isn’t unique to HG. Still, it’s a valuable insight into how the trust and wider industry should work and operate. If investors want to buy what private equity is selling, they should ensure they understand how the sector works, where any potential conflicts lie, and find a manager who’s transparent.

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Japan’s politics are unstable, the yen is trading at multi-decade lows against most major currencies, long-term government bond yields have soared, and inflation is picking up again. Yet corporate Japan is doing just fine. Stocks are regularly reaching new highs and seem likely to continue upwards.

On a price/earnings ratio of about 16, the market’s valuation is at the top of its 10-year range but earnings growth is coming through strongly, says Masaki Taketsume, manager of the £370 million Schroder Japan Trust (LSE: SJG). The consensus for 2026 is for an average gain of 10%.

Rising interest rates, which are expected to reach nearly 2% over the next year, should benefit financials, he says. However, a weak yen means that exporters are expected to see most of the earnings growth. This is reflected in SJG’s portfolio of 60-70 stocks, which includes conglomerate Hitachi, Toyota Motor and electrical-equipment group Fujikura, as well as bank Sumitomo Mitsui and multinational insurer Tokio Marine as its largest holdings. There is a strong weighting to mid and small caps, which account for 47% of the portfolio, against 27% in the Topix index.

Gearing of 13% of net assets show Taketsume’s optimism. A five-year return of 78% (60% over three years) is one of the best of the mainstream Japanese equity funds. Still, the shares trade on a 10% discount to net asset value (NAV).

The record of the £315 million CC Japan Income & Growth Trust (LSE: CCJI) is even better, at 91% over five years and 67% over three. Yet it also trades on an 8% discount. Its top 10 holdings include video games giant Nintendo, engineering group Mitsubishi Heavy Industries (Japan’s largest defence contractor) and tech investor SoftBank. With just 37 stocks, the CCJI portfolio is more concentrated than SJG.

Investments in Japan return to form

Until 2021, JPMorgan Japanese Investment Trust (LSE: JFJ), with £1.2 billion of net assets, and the £916 million Baillie Gifford Japan Trust (LSE: BGFD) led the sector by a mile, but their strong growth bias brought them crashing down to earth. Subsequently JFJ, with a three-year return of 67%, recovered much more quickly than BGFD (38%). However, their one-year returns of 24% are similar and about 5% ahead of SJG and CCJI. These two also trade on a discount of about 10%.

The improvement is partly due to growth returning to favour but also to some much-needed portfolio reorientation. “We had a lot less in cyclical stocks, such as carmakers and banks, so grew more slowly coming out of Covid, but that has changed in the last year,” says Matthew Brett, manager of BGFD. “There are lots companies in Japan which aren’t growing any more so we are having to look away from the index at mid-cap and smaller companies.”

SoftBank is BGFD’s largest holding – its investments in Arm and OpenAI are key to the AI story, says Brett. Rakuten (e-commerce), CyberAgent (digital advertising) and Bengo4.com (online legal services) are also AI beneficiaries. Video games should also be helped by AI, allowing them to be developed faster and more cheaply: Nintendo, Sega Sammy and Square Enix are all in the portfolio.

Pharmaceutical company Eisai has – in partnership with Biogen – the first approved drug for early Alzheimer’s disease. Robotics, an area of national strength – “Japan has a pressing need to manage a declining population” – also features, with Fanuc.

SBI, Japan’s largest stock brokerage, is the second-largest holding. It should capitalise on the growing popularity of the enhanced Nippon Individual Savings Account (Nisa), a tax-free vehicle modelled on the UK ISA. “With inflation coming back, putting money into the bank isn’t so smart any more. Real estate and the stockmarket should benefit.”

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