A reckoning is coming for unnecessary investment trusts

Investment trusts that don’t use their structural advantages will find it increasingly hard to survive, says Rupert Hargreaves

By Rupert Hargreaves

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Investment trusts are one of the best vehicles for creating wealth over the long term. Yet many of today’s trusts should not exist. Some are too small to make a difference and lack economies of scale. Others are not making the most of the benefits that the investment company structure offers.

An investment trust is set up as a public limited company, which has several advantages over other collective investment vehicles. Their closed-ended structure with fixed capital means that they don’t have to worry about money flowing in and out. That’s perfect for holding illiquid assets and also for borrowing money to improve returns. Meanwhile, the oversight provided by the board of directors should hold the investment manager accountable if the trust underperforms for too long.

However, this structure has two obvious drawbacks. One is overheads. Having an independent board of directors is expensive. Valuing and managing illiquid assets can also be costly and time-consuming. Paying for active investment managers has never been cheap, and it’s even more dear if the trust has an in-house management team, rather than sharing a manager who works across several funds. The combined impact of these costs means that many smaller trusts look expensive to their larger peers or open-ended funds with comparable strategies.

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The other is that the share price can – and usually does – deviate from net asset value (NAV). So shareholders cannot be sure if they will be able to sell at close to the value of the assets. In contrast, open-ended funds and exchange-traded funds (ETFs) trade at NAV.

Investment trusts need to start taking their advantages

So trusts need to employ their advantages to justify the disadvantages. Take leverage, which is one reason why trusts have tended to outperform similar open-ended funds over the long term. Trusts can usually borrow at highly attractive rates for long periods. The Scottish American Investment Company (LSE: SAIN), for example, issued three lots of loan notes several years ago, with maturities extending out to 2049 at rates of 2.23% to 3.12%. Yet most trusts just don’t make the most of this opportunity.

Nick Train’s Finsbury Growth and Income (LSE: FGT) has gearing of just 2.4% despite its scale and the manager’s conviction. So investors, managers and boards need to ask if the strategy would work as well in an open-ended structure. For an equity strategy that uses no leverage and invests in liquid stocks, the answer is likely to be yes. If so, there’s no need to operate with the added costs of the investment trust structure. The news that Smithson Investment Trust (LSE: SSON) will convert into an open-ended fund is a good example of this lesson being accepted.

Investment trusts must act soon

The market is slowly getting to grips with these realities. There were five mergers of similar trusts in 2025, with one more planned for early 2026, according to the Association of Investment Companies. Seven trusts and real estate investment trusts (Reits) were privatised – although long-term investors were not happy to see some of them go (eg, BBGI Global Infrastructure). There were 14 liquidations in 2025, the highest number since 2016; one of these, Middlefield Canadian Income, was a conversion to an exchange-traded fund (ETF).

To their credit, some trusts are making changes. There were 40 examples of trusts reducing their fees this year, compared with 32 in 2024 and 26 in 2023. There is more focus on closing discounts, albeit with mixed results. But many need to do more while they still have the chance.

Investors should consider if the trusts they own are worth their place on the market. If they’re not, it may be time to find something better – unless there is a realistic chance of activists forcing a restructuring that could bring windfall gains.