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The past few years have been brutal for one of the UK’s greatest innovations: the humble investment trust. We pioneered this form of democratisation back in the Victorian era, and the London market now boasts hundreds of funds investing in everything from space venture capital to Vietnamese equities to solar farms.
And then, like everything good in finance, it all fell apart. The sector overachieved, launched too many funds, produced poor numbers, and found itself in a prolonged funk. Discounts to net asset value topped 50 per cent in some cases. A bad situation was made worse by the rapid growth not only of exchange traded funds (which lack active fund managers and charge lower fees) but also active ETFs, some of which resemble an open-ended version of an investment trust.
Over the past year or so, the sector has found itself besieged, most notably by Saba, an aggressive activist hedge fund led by Boaz Weinstein. Attempts to wrest control of various trusts have been rebuffed in most cases, but only at significant cost (marketing spend and buybacks that could have been used for the original investment purpose).
Along the way, the bigger story is that too many wealth advisers — the traditional backers of the trust sector — have been burnt by yawning discounts and poor performance and, in my view, are probably never coming back again.
The good news is that data from the first half of this year shows the sector is on the mend — and there are opportunities aplenty for an adventurous investor willing to dip their toes back in.
Before we get to those opportunities, though, let’s review some key facts, courtesy of a recent report from Deutsche Numis. It reckons that the trust sector is on “course for 2025 to be a record year for corporate activity”, through mergers and acquisitions, as well as buybacks, enhanced discount controls, tenders and numerous trusts adopting wind-downs.
Buybacks are at a record high: in the first six months of 2025 they hit £4.6bn, 25 per cent up on the first half of last year. A further £4.2bn was returned through tenders or windups, bringing total return of capital to £8.8bn. Scottish Mortgage on its own repurchased £822mn; Smithson bought £222mn.
More significantly, in my view, 10 funds have introduced single-digit discount targets, most notably Bellevue Healthcare, which announced a show-stopping annual redemption facility.
The impact has been noticeable: across all listed funds, the average discount declined from 16 per cent to 13.5 per cent at the end of last year. I reckon that number could be closer to 11 per cent by the end of this year, assuming there’s no massive market crash.
But the most notable data point is the one that has received the least attention. Numis compares the total returns of all equity funds in traditional mutual funds (called OEICs) with the total share price return of investment companies. ICs outperform unit trusts over 10 years in every sector except two: the UK small-cap and Japanese small-cap sectors.
Simply put, if you’re seeking alpha with fund managers that boast long records, investment trusts are the place to be.
Investment companies also remain the default option for those looking to invest in alternative assets, such as lending and infrastructure. While the traditional fund management industry continues to tout long-term asset funds (LTAFs), I see no evidence that these are convincing investment trust buyers.
So where are the opportunities? I’d suggest the following five. First, in the alternatives space, we’ll see more consolidation, and I think we’ll observe what I call “the Highlander effect”: there can be only one fund left standing in each niche. This implies further consolidation for the smaller vehicles and probably a scaled up survivor fund with lower costs and better liquidity.
Next, many discounts remain stubbornly high in the alternatives space for quality funds. I’d highlight outfits such as International Public Partnerships, which still trades at a 15 per cent discount — a figure I believe is far too high. I expect such discounts to close.
At the same time, a long list of quality funds (such as Greencoat UK Wind and SDCL Energy Efficiency, among others) continue to yield well over 7 per cent per annum, despite an environment where interest rates are likely (though not certain) to decrease.
I’ve been interested in biotech funds for some time, but it’s been a poor investment, as the sector has been in a multiyear bear market and isn’t showing many signs of recovering yet. However, UK-listed life sciences VC Syncona is now winding down, and there could be real value in its shares, especially as they trade at a 45 per cent discount.
I’ll finish with one other more popular sector that deserves closer attention: defensive multi-asset managers. Capital Gearing, for instance, has a relentless focus on trading at par and reducing its discount, but is currently at a 2.1 per cent discount.
BH Macro, the large, listed hedge fund, has spent years trading at substantial premiums but is now at a 9 per cent discount. If markets remain volatile — a likely scenario with Donald Trump — this popular fund could trade back closer to par.
David Stevenson is an active private investor. He owns shares in SDCL Energy Efficiency Income Trust
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