It has been a challenging few years for investment trusts. Rising interest rates, cost-disclosure problems and the dominance of markets by large US tech firms led to wide discounts and the re-emergence of activist shareholders. Yet there is now a series of signals that indicate there is light at the end of the tunnel.
Discounts are narrowing. Fundraising is picking up. A solution to the cost-disclosure issue is in place. There are proposals to address loopholes exposed by activists. Investment trusts have been included in the Pensions Scheme Bill, and more marketing to increase awareness of investing and investment trusts is on its way.
Discounts rose from 2.5% at the end of December 2021 to a peak of 18.8% at the end of October 2023. Since then, discounts have narrowed to 11% at the end of July. The sector has radically reshaped itself with unprecedented levels of mergers and share buybacks, as well as mandate changes and fee cuts. Boards have worked hard to give shareholders a better deal.
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Fundraising is also starting to come back. In the first half of the year, Seraphim Space Investment Trust raised £137 million, while TwentyFour Income Fund and Invesco Bond Income Plus raised £98 million and £85 million respectively.
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Cost-disclosure rules had artificially made investment trusts look expensive, which deterred wealth managers from buying them. This has now changed, with the unique characteristics of investment trusts being recognised by the Financial Conduct Authority (FCA) in its new cost disclosure regime. Other funds no longer have to pull through the costs of investment trusts when investing in them. This positive outcome could well lead to more wealth managers and open-ended funds buying investment trusts next year.
Positives ahead for investment trusts
When discounts widened, activist investors became buyers. This is not unusual; activists have long been a feature of this industry. They usually aim to narrow discounts and secure an exit. So long as their objectives are shared by other shareholders, they are seen as a healthy feature of capital markets.
However, Saba Capital also had another agenda – in some cases it wanted to replace the board and become the investment trust’s manager. The FCA has now put forward proposals to strengthen investor protection and address this gap in the rules. This should prevent a substantial shareholder like Saba, who wants to manage the company, from seizing control of the board to promote its own interests at the expense of other shareholders.
Other positives include investment trusts’ inclusion in the new Pension Schemes Act. Pension schemes will now be able to use investment trusts to meet any requirement to invest in private assets. It’s very early days, but this could result in them investing more in investment trusts in sectors such as infrastructure, renewable energy, private companies and property.
Investment trusts are particularly suitable for these hard-to-sell assets. Since they are listed companies, investors buy and sell their shares on the stock market without altering the capital in the investment trust. Unlike open-ended funds, managers are not forced to sell holdings to meet redemptions, and this allows them to take a long-term view. This also enables investment trusts to give investors access to exciting private companies before they list, such as SpaceX and Anthropic.
The government-backed “Take The Next Step. Invest” campaign should also be helpful. This aims to persuade people with spare cash to start investing. The Association of Investment Companies (AIC) will launch a marketing campaign next year to increase awareness of investment trusts amongst millennials and Gen Z.
Most importantly, investment trusts’ performance over the long term remains strong. The average investment trust has returned 15%, 26% and 148% over one, five and ten years respectively to the end of July 2026. Performance also compares well with open-ended funds. Our “sister funds” research finds that where the same managers run similar investment trusts and open-ended funds, the investment trusts have beaten the sister fund over ten years in 77% of cases.
When it comes to income investing, investment trusts have special advantages. There are 20 “dividend hero” investment trusts that have raised their dividends every year for over 20 years. A trust can do this because it can retain up to 15% of its income, and this revenue reserve can be used to boost dividends when markets are tough. It can also offer an enhanced dividend by paying a percentage of its capital profits as income.
Attend the AIC Investment Company Showcase
To find out more about investment trusts, come to our flagship event, The Investment Company Showcase, on 9 October. You can attend in person at 133 Houndsditch in London or online. We have 30 investment trust managers presenting, including our keynote speaker Job Curtis, manager of City of London Investment Trust. This trust is approaching a record 60 years of dividend increases – an impressive record.
Managers are flying over from Japan and India to speak, covering a wide range of themes from emerging markets and the hunt for yield to property and infrastructure. Presentations include BlackRock World Mining, Monks, Mercantile, Invesco Bond Income Plus, Cordiant Digital Infrastructure and more.
The Showcase is free to register for private investors who use the special MoneyWeek code MW26. We look forward to seeing you there.
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