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.
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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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