‘Investment trusts may finally be seeing brighter days'

Annabel Brodie-Smith says the outlook is improving after several difficult years.

Investment trusts have had a rough few years. Higher interest rates, problems with cost disclosures and the outsized influence of major US technology companies pushed discounts sharply wider, while activist shareholders returned. Now, though, several signs suggest the worst may be behind them.

Discounts are shrinking, while fundraising has begun to recover. The cost-disclosure problem now has a solution, and proposals would close loopholes that activists brought to light. Investment trusts are included in the Pensions Scheme Bill, with further marketing planned to raise awareness of investing and investment trusts.

At the end of December 2021, discounts stood at 2.5%. They widened sharply, reaching 18.8% by the end of October 2023, before narrowing to 11% at the end of July. Meanwhile, the sector has changed dramatically: mergers and share buybacks surged, mandates shifted, and fees fell. Boards have also pushed to improve shareholder returns.

Cost-disclosure rules had made investment trusts appear artificially expensive, discouraging wealth managers from buying them. That has now changed. Under the Financial Conduct Authority's (FCA) new cost-disclosure regime, the distinctive features of investment trusts are recognised, and other funds no longer have to include their costs when investing in them. More wealth managers and open-ended funds may therefore buy investment trusts next year.

Reasons for optimism among investment trusts

Widening discounts attracted activist investors, which is hardly unusual in this industry. They have been involved for years, generally pushing to reduce the discount and arrange an exit. Other shareholders tend to welcome them when their aims align.

However, Saba Capital sometimes had a broader aim: replacing the board and taking over management of the investment trusts. The FCA has proposed stronger investor protections to close this gap in the rules. That should stop a major shareholder such as Saba from taking control of a board in order to manage the company and advance its own interests at other shareholders' expense.

Another positive is the inclusion of investment trusts in the new Pension Schemes Act. Pension schemes can now count them toward any requirement to invest in private assets. It is still early, but the change may lead to greater investment in trusts focused on infrastructure, renewable energy, private companies and property.

Investment trusts fit assets that cannot be sold quickly. Investors trade their shares on the stock market, while the trust's capital remains unchanged. Managers therefore do not have to sell holdings whenever investors want their money back, as open-ended funds often do, so they can invest with a longer horizon. Investors may also gain access to promising private companies before they list, including SpaceX and Anthropic.

The government-backed "Take The Next Step. Invest" campaign should help persuade people with spare cash to begin investing. Next year, the Association of Investment Companies (AIC) will run its own campaign, aimed at making millennials and Gen Z more aware of investment trusts.

Over the long term, investment trusts have continued to perform well. By the end of July 2026, the average trust had returned 15% over one year, 26% over five years and 148% over ten. They also compare favourably with open-ended funds: our "sister funds" research found that, when the same managers run comparable trusts and open-ended funds, the trust outperformed its sister fund over ten years in 77% of cases.

Income-focused investors get a few distinct advantages from investment trusts. Twenty "dividend hero" trusts have increased their payouts every year for more than 20 years. That record is partly possible because a trust may hold back as much as 15% of its income, building a reserve to support dividends during difficult markets. It may also increase the payout by distributing part of its capital profits as income.

Attend the AIC Investment Company Showcase

Want to learn more about investment trusts? Join us at The Investment Company Showcase on 9 October, our flagship event. Attend in person at 133 Houndsditch in London or watch online. Thirty investment trust managers will present, including keynote speaker Job Curtis, manager of City of London Investment Trust. The trust is nearing 60 consecutive years of dividend increases - an impressive record.

Managers from Japan and India are flying in to speak. Their sessions will cover emerging markets, the search for yield, property and infrastructure, along with presentations on BlackRock World Mining, Monks, Mercantile, Invesco Bond Income Plus and Cordiant Digital Infrastructure.

Private investors can register for the Showcase free of charge with the special BFIA code MW26. We look forward to welcoming you.