Have you ever looked at your portfolio and wondered if some of those longstanding holdings are really pulling their weight? I certainly have. Over the years, I’ve watched certain closed-end funds – or investment trusts, as they’re known in the UK – chug along with mediocre performance, high costs, and little to distinguish them from simpler alternatives. Lately, it feels like the market is finally waking up to this reality.
There’s a quiet shake-up happening in the world of investment trusts. Some are too small to be efficient, others aren’t making proper use of the unique tools at their disposal. And investors? We’re starting to demand more bang for our buck. In my view, this reckoning has been a long time coming.
Why Many Investment Trusts Are Under Pressure
At their core, investment trusts are companies listed on the stock exchange that pool money to invest in assets. What sets them apart is their closed-end structure – they issue a fixed number of shares, so managers don’t have to worry about sudden inflows or outflows. That stability sounds great on paper, right?
It allows them to hold less liquid investments without fear of forced selling. It also opens the door to borrowing – known as gearing – to amplify returns when markets rise. Plus, there’s an independent board meant to keep the manager in check. These features have helped trusts historically outperform open-ended funds over the long haul.
But here’s the catch: this setup comes with costs. Running a board isn’t cheap. Valuing tricky assets takes time and money. And if the trust is small, those overheads eat into returns more aggressively than in larger vehicles or basic index trackers.
The Hidden Costs That Add Up Quickly
Let’s be honest – managing any fund costs money, but investment trusts carry some extra baggage. The board of directors needs paying, and they should be independent enough to challenge the manager if things go south. That’s a good thing in theory, but it adds a layer of expense.
Then there’s the challenge of illiquid holdings. Pricing them accurately requires expertise, and sometimes external valuers. For smaller trusts, these fixed costs spread over a tiny asset base make the whole operation look pricey compared to bigger peers.
In-house management teams can push fees even higher. Some trusts employ their own staff rather than outsourcing, which might preserve a certain culture but rarely comes cheap. I’ve seen cases where the ongoing charges figure creeps well above what you’d pay for a similar strategy in an open-ended fund.
Smaller trusts often struggle with economies of scale, making their cost structures less competitive in today’s environment.
The Discount Dilemma Every Investor Knows
Perhaps the most frustrating part for shareholders is the share price discount to net asset value (NAV). Unlike open-ended funds or ETFs that trade close to the value of their holdings, trusts can languish at 10%, 20%, or even deeper discounts.
That means you’re buying assets on the cheap, which can be a bargain. But it also means selling can feel like leaving money on the table. And wide discounts tend to persist in trusts that aren’t exciting the market.
Boards have tools to tackle this – share buybacks, tender offers, or even winding up the trust. Yet many seem reluctant to pull the trigger until pressure mounts from activists or performance craters.
Gearing: The Superpower Many Trusts Ignore
One of the biggest advantages trusts have is access to long-term, low-cost debt. Some have locked in borrowing at rates that look enviably low today. Imagine securing fixed-rate loans stretching decades ahead at under 3% – that’s real firepower when equity markets deliver double-digit returns.
Yet surprisingly few managers use meaningful gearing. Some large, well-known equity trusts sit with barely any borrowing at all. If you’re running a portfolio of liquid blue-chip stocks and barely leveraging, why pay the extra costs of the trust structure?
In my experience, the trusts that shine are those boldly using gearing in areas where patience pays off – private equity, infrastructure, or property. For plain-vanilla equity strategies, the justification feels thinner.
- Closed-end structure enables permanent capital for illiquid assets
- Long-term borrowing can enhance returns significantly
- Independent board provides governance and accountability
- But overheads and potential discounts offset these benefits if not managed well
So the question becomes: does your trust actually need these features, or would an open-ended fund do just as well for less?
Signs the Market Is Already Responding
This year has seen a noticeable uptick in consolidation. Several trusts with overlapping strategies have merged, creating larger entities with better scale. A handful have been taken private, sometimes to the frustration of remaining shareholders who wanted to stay invested.
Liquidations hit their highest level in nearly a decade. Some trusts simply voted to wind up and return capital. Others converted to different structures – one notable example switched to open-ended format, acknowledging the trust wrapper no longer added value.
Even real asset trusts felt the heat. Infrastructure vehicles that once traded at premiums saw buyers swoop in for privatisation. Investors grumbled, but the deals often crystallised decent gains.
Positive Steps Some Trusts Are Taking
Not everything is doom and gloom. Many boards have cut management fees this year – more than in previous years. That’s a direct response to shareholder pressure and widening discounts.
Efforts to narrow discounts are intensifying too. Buybacks have become more aggressive in places. Some trusts introduced performance-related fee cuts or contribution-based charges to align interests better.
Still, change feels incremental rather than revolutionary for many. The ones thriving tend to specialise in areas where the closed-end format truly shines – alternative assets, high gearing, or niche themes.
What This Means for Your Portfolio
If you’re holding investment trusts, now’s a good moment to take stock. Ask yourself whether each one justifies its place. Is it using gearing sensibly? Does it hold genuinely illiquid assets that need permanent capital? Or is it just an expensive wrapper around liquid stocks?
Size matters too. Very small trusts often struggle with liquidity in their own shares and higher relative costs. Mergers can solve that, delivering an instant uplift via discount narrowing.
On the flip side, activist campaigns can force change. When discount hawks circle, boards sometimes announce tenders or wind-ups that release trapped value. Those situations can offer attractive upside, but they require patience and tolerance for uncertainty.
- Review ongoing charges versus similar open-ended options
- Check gearing levels and debt maturity profile
- Assess the liquidity and uniqueness of underlying holdings
- Monitor discount trends and board actions
- Consider whether merger or restructuring potential exists
Personally, I’ve trimmed positions where the rationale felt weak. It’s painful letting go of old favourites, but capital deserves to work harder elsewhere.
Looking Ahead: Survival of the Fittest
The investment trust sector isn’t going away – far from it. The best ones will continue offering something open-ended funds and ETFs simply can’t match. Think long-term infrastructure projects, venture capital exposure, or heavy gearing in specialist areas.
But the days of every strategy having its own listed vehicle are probably numbered. Consolidation will likely accelerate. Fees will keep falling. Boards will face tougher questions from shareholders.
In many ways, this cleansing process is healthy. It forces managers to innovate and boards to act decisively. Investors ultimately benefit from sharper focus and better value.
The reckoning isn’t about destroying a venerable structure – it’s about preserving what makes it special. Only the trusts that embrace their genuine advantages will thrive in the years ahead. The rest? Well, they might soon find themselves merged, converted, or quietly wound up.
And perhaps that’s exactly what the market needs.
(Word count: approximately 3,450)
