Have you ever looked at a listed portfolio and thought the price on the screen simply does not match the assets sitting underneath it? That feeling has defined the last few years for many holders of investment trusts. One minute the structure looked elegant. The next, rising rates, messy cost labels and a market obsessed with a handful of giant technology names left the whole sector trading at an awkward gap. I have found that this is usually the moment people either give up or start paying attention. The more interesting question is whether that gap is finally starting to close for real.
Why The Mood Around Investment Trusts Is Shifting
Investment trusts are listed companies that hold a portfolio of assets. Investors trade the shares on the stock market. That sounds simple. In practice it creates a second price: the share price can sit above or below the value of the holdings. When it sits below, you get a discount. When it sits above, you get a premium. For a long stretch the discount was the story everyone talked about, and not in a flattering way.
Discounts moved from a modest 2.5% at the end of 2021 to a peak near 18.8% in late 2023. By the end of July they had tightened to around 11%. That is still not cheap in the casual sense, and it is certainly not a victory lap. It is, however, a change of direction. Boards have been busy. Mergers arrived in unusual volume. Share buybacks became almost routine. Some mandates were rewritten. Fees came down. None of that is glamorous. All of it matters if you care about the gap between price and value.
A listed portfolio can look unloved for a long time and still be doing the job it was built to do. The share price is a vote. The net asset value is the work.
Fundraising had almost gone quiet. Then it started to stir again. In the first half of the year one space-focused trust raised £137 million. Two income specialists raised £98 million and £85 million. That is not a boom. It is a pulse. After a period when new capital felt politically impossible, a pulse is worth noticing.
The Discount Story Was Never Only About Rates
Higher interest rates hurt anything that looked like a long-duration asset. Fair enough. Property, infrastructure, private companies and even some equity strategies got marked down because cash in the bank suddenly paid something again. That part of the tale is familiar. What made investment trusts look worse than they needed to look was the way costs were presented.
Cost-disclosure rules had a habit of making the structure appear expensive. Wealth managers hesitated. Some open-ended funds treated the numbers as a reason to stay away. The unique features of a closed-ended company got lost in a spreadsheet. That has now shifted. The regulator has recognised those features in a new cost regime. Other funds no longer have to pull the costs of an investment trust through their own figures in the same clumsy way. In my experience, distribution teams care about this more than they admit in public. If the paperwork stops screaming “expensive”, buying becomes easier next year.
Is that enough on its own? No. A cleaner label does not fix a weak portfolio. It does remove a friction that had nothing to do with the quality of the underlying assets. That distinction is easy to miss when the market is in a bad mood.
Activists Arrived Because The Gap Invited Them
When discounts widen, activist investors tend to appear. This is not new. The closed-ended world has lived with that pressure for decades. The usual aim is simple enough: shrink the discount, force a corporate action, and find an exit. If other shareholders want the same outcome, the process can even be healthy. Capital markets are not a dinner party.
The more awkward chapter arrived when one large holder wanted more than a narrower discount. In some cases the goal looked like board control and, behind that, a shot at becoming the manager. That is a different game. Proposals are now on the table to tighten investor protection and close that gap in the rules. The point is not to ban disagreement. The point is to stop a substantial shareholder from using the boardroom as a shortcut to promote its own management ambitions at everyone else’s expense.
- Wide discounts attract capital that wants a catalyst.
- Shared objectives among holders can still be constructive.
- Control of the board is a separate question from discount control.
- Clearer rules reduce the chance of a quiet transfer of influence.
I have a mild bias here. Boards should be allowed to defend a long-term mandate without pretending activists do not exist. Shareholders should be allowed to challenge a sleepy board without handing the keys to a party that wants the contract. Both things can be true at once. That is the adult version of governance, even if it is less exciting than a proxy fight.
Why The Structure Still Fits Awkward Assets
Open-ended funds live with daily dealing. If investors want out, the manager may have to sell holdings to meet those redemptions. That is fine for liquid shares. It is a poor fit for infrastructure, renewable energy, private companies and some property. Investment trusts do not have to shrink the portfolio every time a seller appears. The seller sells the share. The capital inside the company can stay put.
That is why pension schemes are now being pointed toward this wrapper when they need exposure to private assets. It is early. Nobody should pretend a line in a bill instantly produces a flood of tickets. Still, the logic is tidy. A pension fund that must hold illiquid things does not want a vehicle that can be forced into a fire sale. A listed company with permanent capital is built for that job.
There is another angle that gets less airtime. The same structure can give ordinary investors a look at private businesses before those names reach a public listing. Think of the kind of company that lives in late-stage private markets for years. You do not have to like every name in that universe. You do have to admit that a closed-ended portfolio is one of the few mainstream ways to sit in that queue without writing a cheque the size of a building.
Liquidity belongs at the share level when the assets themselves refuse to be liquid. That is the whole point of the wrapper.
– Market practitioner view
Performance Still Does The Heavy Lifting
Marketing campaigns help. Cleaner cost labels help. Buybacks help. None of that replaces results. To the end of July the average investment trust had returned about 15% over one year, 26% over five years and 148% over ten years. Those figures will move. They always do. The ten-year number is the one I keep coming back to, because this product is not designed for a weekend trade.
Comparisons with open-ended “sister” strategies are even more revealing. Where the same managers run a similar trust and a similar open-ended fund, the trust has beaten the sister fund over ten years in 77% of cases. That is not a rounding error. Gearing, the ability to hold cash through redemptions, and the simple fact that the manager is not constantly trimming winners to meet outflows all play a part. Perhaps the most interesting aspect is how rarely this point features in casual conversation. People argue about discounts for months. They spend less time on the compounding that happened while they were arguing.
| Period | Average Trust Return | What It Suggests |
| One year | About 15% | Near-term recovery in risk appetite |
| Five years | About 26% | A choppy stretch that still compounded |
| Ten years | About 148% | The horizon the structure is built for |
Does this mean every trust is a bargain? Of course not. Some boards were slow. Some strategies were fashionable at the wrong time. Some discounts exist because the assets themselves deserve a haircut. A narrower average discount is a climate change, not a guarantee that every name in the sector is suddenly high quality.
Income Is Where The Design Shows Off
If you care about a rising cheque, the closed-ended model has a quirk that open-ended products cannot copy as easily. A trust can hold back up to 15% of its income in a revenue reserve. In a tough year that reserve can support the dividend. Over long stretches that habit produces the so-called dividend heroes: trusts that have raised their payout every year for more than two decades. There are twenty of them. One well-known London-focused name is closing in on sixty years of increases. That is not a marketing slogan. That is a process.
Trusts can also pay an enhanced dividend by using a slice of capital profits. Purists dislike that. Income investors often like the cash. I sit somewhere in the middle. An enhanced payout is useful if the board is honest about what is income and what is a return of capital. It becomes sloppy if the language pretends every penny came from coupons and dividends. Clarity first. Then the cheque.
- Build a reserve in generous years rather than paying every last penny.
- Use that reserve when markets refuse to cooperate.
- Keep the policy boring enough that holders can plan around it.
- Say plainly when capital is being used to top up the dividend.
Income investing is having another moment because cash rates will not stay interesting forever. When the easy yield on deposits fades, people remember vehicles that can grow a distribution. That memory is already visible in the funds that managed to raise fresh capital this year. Bond-income specialists did not raise money by accident. They raised it because the cheque still matters.
Boards, Fees And The Quiet Clean-Up
The sector has been through a tidy-up that would have looked extreme a decade ago. Mergers reduced the number of subscale vehicles. Buybacks retired stock when the discount was wide. Fee cuts arrived after years of polite conversation that went nowhere. Mandate changes tried to make some portfolios easier to explain. This is the unglamorous work that does not trend. It is also how a sector stops looking like a museum.
In my experience, the best boards treat the discount as a signal rather than an insult. If the gap is wide because the strategy is misunderstood, they talk. If the gap is wide because the strategy is tired, they change it. If the gap is wide because the market is simply in a mood, they buy back stock and wait. Mixing those three responses is the hard part. Too many people want one lever for every problem.
A practical board checklist: Watch the discount without worshipping it Retire stock when the maths is obvious Cut fees before investors demand a revolt Keep the mandate short enough to explain Defend independence without ignoring votes
Fee cuts deserve a second look. A cheaper ongoing charge does not turn a weak manager into a strong one. It does stop the product from leaking extra points while the discount is already doing damage. Small leaks become large over ten years. That is not philosophy. That is arithmetic.
Who Might Buy Next And Why Timing Gets Tricky
Wealth managers were the obvious missing buyer while cost labels looked hostile. If that friction really fades, some of those tickets can return. Open-ended funds that used investment trusts as an underlying holding may also find the paperwork less embarrassing. Pension schemes are a slower animal. Inclusion in a new pensions framework is a door, not a stampede. Doors still matter.
There is a public campaign aimed at people sitting on spare cash who have never made the jump from saving to investing. Industry marketing aimed at younger adults is due as well. Will millennials and Gen Z suddenly fall in love with a Victorian legal structure? Probably not overnight. Will a clearer story about private assets, rising dividends and listed access help a little? I think so. Awareness is not allocation. It is the step before allocation.
Timing remains the awkward guest at this table. Discounts have already narrowed from the worst point. Buying only because the gap used to be 19% and is now 11% is a thin thesis. The better question is whether the assets, the board and the payout policy still make sense at today’s price. Some names will be less interesting precisely because the panic has eased. That is how markets work. Relief and opportunity are not the same thing.
Private Companies, Infrastructure And The Long View
The case for using this wrapper in private markets is not a fashion argument. It is an engineering argument. Unlisted holdings do not like forced sales. A listed share can still be sold at 3pm on a Tuesday. The portfolio does not have to be dismantled to make that trade happen. Infrastructure and renewable energy have the same profile: long lives, lumpy cash flows, occasional political noise. Property has lived through its own version of that story.
None of those sectors is automatically attractive today. Some renewable vehicles were priced for a world of cheap money. Some property names still carry balance-sheet questions. The wrapper does not rescue a bad asset. It does give a decent asset room to breathe. That is a quieter claim than the brochures sometimes make, and I prefer it that way.
Access to private companies is useful only if the entry price, the governance and the exit route are all adult conversations.
Names such as late-stage technology businesses get mentioned because they are famous. Fame is not a valuation method. A trust that can hold those positions without daily dealing pressure has an advantage. The investor still has to ask what was paid, who sits on the board, and what happens if the listing calendar slips by three years. Closed-ended does not mean consequence-free.
What Still Could Go Wrong
It would be sloppy to write this as a sunrise piece and stop there. Rates could stay restrictive for longer than the market wants to admit. A second wave of risk-off selling could open discounts again. Activists could still test the new rule proposals. A merger wave can hide weak strategies inside larger ones. Buybacks can shrink a trust until it is no longer useful. Fee cuts can be cosmetic. Pension allocations can arrive late or not at all.
- Discounts can widen again if risk appetite fades.
- Governance reform can lag the next activist campaign.
- Illiquid holdings can still be marked down hard.
- Income reserves are finite if payouts stay aggressive.
- New buyers can take longer than the headlines imply.
There is also the simple human problem. After a bruising few years, some holders just want the story to be over. That impatience can push boards into actions that look decisive and age badly. A wind-down at the wrong price is not discipline. It is exhaustion dressed as strategy. I would rather see a board explain why the mandate still deserves time than watch it surrender because the comment section got loud.
How I Would Read The Sector From Here
Start with the discount, then ignore it for a minute. Look at the assets. Look at gearing. Look at the reserve. Look at the board’s actual behaviour over the last two years, not the adjectives in the annual report. Then come back to the discount and ask whether today’s gap pays you for the risks that remain. That sequence sounds obvious. Plenty of people still do it backwards.
Income names with a real reserve and a record of rising payouts deserve a different conversation from growth vehicles that only looked cheap because the market hated anything without a mega-cap technology label. Private-asset trusts deserve a different conversation from liquid equity trusts. Lumping the whole sector into one mood is how the last cycle became so messy in the first place.
If fundraising continues, if cost labels stay cleaner, and if governance proposals have teeth, the buyer base can broaden. That would be the real light at the end of the tunnel. Not a slogan. A thicker order book. Until that order book shows up in size, the honest stance is cautious optimism with a pencil, not a megaphone.
A Practical Way To Sit With The Uncertainty
You do not need a conference badge to do the work. Read the latest factsheet. Check whether buybacks actually happened or were merely authorised. See if the dividend was covered by revenue or propped up by capital. Ask whether the manager still owns the same process that produced the ten-year numbers. Then decide if the current share price is a fair entry for that process.
Events that gather thirty managers in one room can help if you use them as a shortcut to compare tone. Listen for who talks about reserves and who talks only about narrative. Listen for who admits the discount was partly self-inflicted. The useful meetings are the slightly dull ones. The flashy ones are entertainment.
I keep coming back to a simple line. The structure was never the villain. The climate around it was. Climate can change without turning every name into a gift. That is the tension worth sitting with. Light at the end of the tunnel is not the same thing as a clear track all the way home. It is only a reason to look up from the worst of the last three years and ask a better set of questions than “why is this still cheap?”
If the next twelve months bring more issuance, tighter average discounts and a few pension tickets into private-asset trusts, the sector will feel different. If they do not, the long-term performance record and the income machinery will still be there. Either way, the wrapper remains one of the few listed ways to hold awkward assets without pretending they can be sold by 4pm every day. That feature did not go out of fashion. The price of it did. Prices, unlike features, can move.
