Picture the scene: it’s late 2022 and stock markets have just been hammered. Your portfolio is down, but something odd is happening with your investment trusts – they’re falling even harder than the assets they own. Discounts that used to hover in low single digits suddenly explode towards 20%. By the end of 2023 the average sits close to 19%. You can almost hear the collective groan from wealth managers and private investors alike.
Fast forward to today and markets have roared back, yet the average discount is still stuck around 14%. Some sectors – think private equity, infrastructure, renewable energy – are nursing gaps of 30% or more. Issuance has dried up. Trusts are merging, winding up, or facing noisy activists. The phrase “existential crisis” is suddenly everywhere.
But here’s the thing – I’ve heard that phrase before. And if you’d been around in the 1970s, you’d have heard it too, only louder.
A Quick History Lesson Most Investors Have Forgotten
Let’s rewind exactly fifty years. January 1975. The UK stock market has just fallen 70% in nominal terms (80% after inflation) over the previous two years. Investment trust discounts peak above 40% and then, even after the market rebounds, they stay stubbornly around 25% for the next decade.
Private investors – the traditional backbone of the sector since the very first trust launched in 1868 – were walking away in droves. Inflation was rampant, bear markets were brutal, and life-insurance policies or unit trusts (which traded at NAV) looked far more attractive from a tax perspective.
On top of that, the deck was stacked against the ordinary buyer. No ISAs, no SIPPs, 2% stamp duty, 1.65% broker commission both ways, and bid-offer spreads only visible when your stockbroker physically walked onto the floor of the Stock Exchange. Share buybacks were actually illegal. Borrowing costs were sky-high. Boards were self-perpetuating clubs. Communication was basically the annual report and that was it.
Sound grim? It was. Yet the sector didn’t die. In fact, it came back stronger.
What Changed After the 1970s Nightmare?
By 1981 the mood had started to shift. Pension funds and insurance companies – previously uninterested – began buying investment trusts as a cheap way to get equity exposure. Specialisation exploded: Japan trusts, smaller-companies trusts, energy, technology. Exchange controls were scrapped in 1979, letting trusts diversify globally just in time for overseas markets to take off.
Corporate raiders tried to exploit wide discounts (Robert Maxwell and others launched hostile bids), but the sector adapted. Governance slowly improved. Buybacks eventually became legal. And over the next two decades discounts narrowed dramatically as private investors returned, helped by PEPs and then ISAs.
“The tide for investment trusts has turned and the climate has changed dramatically for the better.”
– Industry observer, 1981
That quote could be written tomorrow and nobody would bat an eyelid.
Why Today Feels So Familiar
Let’s be honest – plenty of trusts have lost their way. Some loaded up on overvalued private equity in 2021 at tiny discounts (or premiums) and are now paying the price. Others are stuck in yesterday’s themes: commercial property, renewable infrastructure, or biotech names that never made it to market.
Add in the continued exodus from UK equities – both direct stocks and the trusts that own them – and you have a perfect storm for wide discounts.
But zoom out and the picture looks less apocalyptic.
- Strong performers (certain global, technology, or India trusts) still trade at premiums or tiny discounts.
- Boards can now buy back shares aggressively – something impossible in the 1970s.
- Revenue reserves in many trusts are at record levels, giving heroic dividend growth even when portfolio income is flat.
- Cost disclosure rules introduced in 2012 have actually made trusts look more expensive on paper than they really are, scaring off some buyers who don’t understand the nuance.
- Gearing is being used sensibly by the best managers to enhance long-term returns.
In my view the last five years have been a period of creative destruction. Weak trusts are being merged or wound up. Capital is being returned to shareholders or reallocated to better vehicles. That’s painful in the short term, but healthy over the long term.
The Real Risks – and Why They’re Probably Overblown
Activists get a bad rap, but sometimes they’re the wake-up call a sleepy board needs. When a trust has underperformed its benchmark for a decade and sits on a 35% discount, tender offers or continuation votes focus minds wonderfully.
Liquidity is another common complaint. Yes, daily traded volume can be thin on smaller trusts. But for anyone with a horizon measured in years rather than days, that’s a feature, not a bug – it keeps the hot money out and lets good managers take a longer view.
Valuation of unquoted assets raises eyebrows, especially after the Woodford debacle. Fair enough. But most private equity or infrastructure trusts now use independent valuers and publish detailed methodology. The discount already prices in a huge margin of safety – often 30-40% below stated NAV.
Where We Go From Here
History rhymes. Discounts this wide have always eventually narrowed, often sharply. The mechanism is simple: poor performers disappear, capital returns to shareholders, the supply of shares shrinks, and performance from the survivors improves. Demand then returns.
We’re already seeing green shoots. A handful of trusts have managed to issue shares again in 2025. Merger activity is rationalising overlapping mandates. Some of the best managers are buying back stock hand over fist – and if the discount doesn’t narrow, they simply cancel the shares and everyone left wins bigger when it eventually does.
Perhaps the most interesting development is institutional interest picking up again. Pension funds and sovereign wealth funds are quietly accumulating stakes in discounted private markets vehicles – exactly what happened in the early 1980s.
“An unattractive trust will sell at a bigger discount no matter how drastically the number of shares is reduced overall, while an attractive trust will sell at a small discount or even a premium.”
– Veteran analyst, four decades ago
That sentence is as true today as it was then. Focus on quality management, reasonable fees, strong balance sheets, and growing dividends. The discount will take care of itself – eventually.
Final Thought for the Patient Investor
If you wait for discounts to disappear before buying, you’ll miss the best returns. The time to be greedy is when others are fearful – and right now, fear is thick in the investment trust sector.
The structure remains one of the most powerful in finance: independent boards, permanent capital, ability to gear sensibly, power to smooth dividends, and a 150-year track record of surviving everything the world has thrown at it.
Crisis? Sure, for some trusts. Existential? I very much doubt it.
As someone who lived through the last “end of investment trusts” scare (and the one before that), my money is on the old ship sailing through the storm once again – and those on board enjoying the ride when the sun finally comes out.
