Investment trusts continue to be a wise investment

Investment trusts are losing money

However, according to James Mackreides, the rush for the exits by investors is not all there is to it.

Investment trusts had a successful year last year. According to the FTSE All-Share Investments index, which does not include 3i, they experienced a total return of 16.1 percent, which was significantly lower than the 24 percent total return of the All-Share index but higher than the 14.4 percent total return of the more representative MSCI All Countries World index. The average discount to net asset value was narrowed by roughly 2 percent to 12.5 percent, which improved performance. Additionally, trusts used borrowings to improve performance.

In the long run, most closed-end funds have outperformed comparable open-ended funds, with ten-year average annualized excess returns of 1.5 percent, as noted by Christopher Brown, head of investment companies research at JPMorgan.

The AIC trade association reports that there are roughly 300 investment trusts with a combined asset value of 265 billion. This was a slight decline for the year, as equity withdrawals offset the performance-related increase. There are five in the FTSE 100 and 85 in the FTSE 250, with sizes ranging from a few million pounds to Scottish Mortgage's 13.6 billion market value. Performance naturally varies greatly; in 2025, Macau Property lost 74 percent and Digital 9 lost 69 percent, while Golden Prospect Precious Metal gained 165 percent and Seraphim Space gained 120 percent.

The article is continued below.

Get six free BFIA issues right now.

Get unmatched financial analysis, insight, and professional advice that will help you.

Get your trial underway.

Investment trusts are at a turning point.

According to Brown, "a record 18.9 billion of net assets exited the sector" despite the industry's overall strong performance. Ten and a half billion dollars came from share buybacks, and "there was a wave of managed wind-downs and liquidations." Additionally, there were a lot of mergers, which typically involved a partial return of capital. Out of the 27 names that vanished (after 24 in 2024), Achilles Investment was the only new issue that raised 54 million. Existing trusts raised a total of 530 million dollars.

According to Brown, "consolidation leaves behind a better-quality sector," but it also lessens competition and choice. Throgmorton and BlackRock UK Smaller Companies are two examples of competing trusts that might make sense to combine under one management company. However, internal competition can also be advantageous, and shifting the management contract to a different location is an option.

According to Brown, "the industry is at a crucial crossroads, but all is not gloom." Changes to cost-disclosure regulations (following a vigorous lobbying campaign) have reduced regulatory hostility, but listed investment companies are still not eligible as assets for defined-contribution default pension funds under the Pension Schemes Bill. Even if it leads to better performance or exposure to a market segment they do not cover, wealth managers and other professional investors detest what they perceive as the subcontracting of their work to another fund manager.

However, closed-end funds offer unique access to unlisted behemoths like SpaceX, as well as to real estate, infrastructure, and other illiquid assets. The government's preference for theoretically semi-liquid "long-term asset funds" (LTAFs) demonstrates that the lessons learned from previous open-ended property fund disasters have either been disregarded or ignored. Brown challenges the practice of private-equity LTAFs purchasing secondary investments at a discount and then marking them up to net asset value, as well as the ability of semi-liquid funds with quarterly redemptions of just 5% to handle market volatility.

Up until mid-February of 2026, the performance remained strong, with a total return of 1.9%. While other markets, particularly the UK, emerging markets, and small and mid-caps, have continued to perform well, the SandP 500 has been flat in sterling terms. However, according to Brown, strategic reviews, managed wind-downs, and mergers totaling 8.9 billion are planned, excluding the merger of BlackRock's two smaller company trusts.

It's best when things are at their worst.

In actuality, investment firms are doing well because trusts are contracting more quickly than investors are selling, not because of net buying. Investors are selling more than just trusts; over the past ten years, there have been 119 billion net withdrawals from UK-domiciled and equity-focused open-ended funds, with 74 billion of those withdrawals occurring in the last four years. While some of this has gone into US/global funds and passive funds like exchange-traded funds (ETFs), UK-based investors are net sellers, particularly in their home market. Although they make up a small portion of the total, UK-focused investment trusts are all listed in the UK and are therefore caught up in the exit rush.

That will be seen by contrarian investors as an excuse to be carefree when making investments. Net buying will eventually return to the investment trust sector, discounts will either disappear or become much narrower, and there will be an avalanche of issuance, including new trusts, in a cycle that has been repeated several times over the past 50 years. It will be time to start battening down the hatches and getting ready for hard times at that point, but most likely not before.