Outlook brightens for investment trusts despite sector shakeout

• 13 June 2025
• QuotedData

Boards get proactive as discounts retreat and investors return

Ahead of our 2025 Investment Trust Forum, I thought it might be worth looking at the state of the London-listed companies market. The message that I want to leave you with is that the outlook for the sector is pretty good. However, I am aware that some readers may need to be convinced of this.

A history of discounts

Let us begin with some history. A good place to start is the chart in Figure 1, which shows the median discount across all investment companies. Discounts are a good indication of sentiment towards investment companies. This is because, simplistically, they chart the balance of buying and selling interest.

Going into 2020, the mood was relatively upbeat. The investment companies that we were covering were trading on a median discount of about 5.5%. Then COVID hit, investors panicked, and discounts ballooned. If you were lucky/clever enough to go bargain hunting in March, you were swiftly rewarded. Central banks and governments stepped in to calm nerves, slashing interest rates and injecting stimulus into economies. In the autumn, we had confirmation that the vaccines worked, and the investment company IPO market re-opened.

Over 2021, the IPOs continued, but trouble was looming as the inflation rate started to climb. Going into 2022, it became clear that interest rates would need to rise. However, Russia’s invasion of Ukraine exacerbated the problem, triggering food and energy price spikes.

As investors were presented with more attractive yields on cash and bonds, the shine came off the alternative income sectors. This included areas such as infrastructure and renewables. Trusts that had traded at premiums for most of their lives found themselves on widening discounts. The problem was compounded by the cost disclosure issue that we have covered extensively.

The tide is turning

However, what is clear is that the tide began to turn again just over a year ago. Yes, interest rates did start to fall again, but I think we were also seeing the effects of the efforts that boards have made to tackle discounts through measures such as buybacks, tenders, mergers, wind-downs, and dividend hikes.

There was a spike in discounts again around ‘Liberation Day’, but Trump’s backtracking meant that was short-lived. The sector’s discount problem is not fixed, but things are headed in the right direction.

Some credit must also go to Saba for taking advantage of the deep value available within the sector. Its objectives may be self-serving and its methods crude, but it has poured money into the sector and reportedly is inspiring copycat investors to do the same. We are not there yet, (in fact, I am expecting more fireworks) but as discounts narrow eventually these activists will run out of targets.

But is the sector disappearing?

Three of the trusts that Saba targeted in its first wave of attacks (or perhaps second, if you count nudging European Opportunities to institute its tender offers as the first) are – or will shortly be – no longer with us (Keystone, Henderson Opportunities, and Middlefield Canadian). However, this is just the tip of the iceberg when it comes to trusts leaving the sector.

2020 saw 8 new trusts launched and then 16 in 2021. However, the IPO market snapped shut in 2022 and, has barely reopened since (Ashoka Whiteoak Emerging and Onward Opportunities in 2023, Aberforth Geared Value and Income in 2024, Achilles Investment Company this year).

Boards often get castigated for inaction, but, with the exception of a few stragglers, this view looks grossly out of date. Boards have professionalised over the last decade, directors take their roles seriously and are busy – the discount control measures I mentioned above can eat up a lot of directors’ time. We have already seen 16 exits so far this year, and as I wrote in an article for Citywire a couple of weeks ago, of the 281 investment companies that we cover that are left, 38 are in managed wind-down, being taken over, or otherwise set to disappear.

The industry moves in cycles

That might seem worrying, but we have been here before. The industry moves in cycles. In the early 2000s we saw split cap mania and then crisis – an explosion of trust creation and destruction. Then, in the run up to the financial crisis we saw a swathe of often highly geared property trusts launched and a dramatic expansion of the hedge fund sector. The crisis killed off many of the property trusts and a few private equity vehicles. When it turned out that the hedge funds were not the defensive investment that had been hoped for, there was an equally dramatic rush for the exit. In the post GFC era of low interest rates, the demand was for income producing vehicles. Many of these failed even before interest rates started to rise.

As Figure 3 shows, the last gasp of the IPO market brought with it a number of vehicles that have struggled since. There are some gems in there, and some that are oversold and will recover if given time. However, launching in a period of heightened investor enthusiasm meant that life in a more normal environment was always going to be hard.

Unfortunately, the sector’s history often feels like one of boom and bust. However, if you look through the noise, there are trusts that are over 100 years old and have adapted to survive and thrive such as Alliance Witan and Scottish American, trusts that are focused on multi-decade issues such as climate change and environmental pollution – The Renewables Infrastructure Group and Foresight Environmental Infrastructure being good examples, and trusts that have leant into the flexibility afforded by the investment company structure such as JPMorgan Global Growth and Income. These survivors and innovators can form the bedrock of a sector that will be with us for many years yet.

Written By James Carthew

Head of Investment Company Research