Where next for investment trusts?
From beer to James Bond, British industries have continually reinvented themselves to thrive in a changing world. Investment trusts may be going through a similar transition today.
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The centre of global finance is hotly contested today, but for many decades, London was the unrivalled champion – and investment trusts were a testament to its bold spirit of innovation. As far back as Victorian times, they were channelling capital into American railways, Indian textiles and what would today be considered emerging market debt. The sector is still hugely important to the City; it boasts a market capitalisation of close to £200 billion (including closed-ended and real estate investment trusts) and accounts for around 8% of the value of the FTSE All Share.1
Investment trusts have clear benefits for private clients, providing an entry point to illiquid investments, such as private equity and infrastructure, as well as expertise in specialised markets, like smaller companies and emerging markets. In both cases, they offer a degree of liquidity and the protection of an independent board to hold managers to account.
Over the past few years, however, the sector’s performance has been disappointing. There have been instances of underlying investments performing poorly, such as battery storage operators misjudging demand from National Grid. But in many cases, the underwhelming performance is a result of trusts trading at wide discounts to the value of their underlying assets – or net asset value (NAV). This reflects weakening demand from traditional investors in the sector, including wealth managers (though not Cazenove Capital).
The recent performance of investment trusts has been underwhelming
Index total return, rebased to 100
Source: LSEG Datastream 29 April 2025. Past performance is not a guide to future returns and may not be repeated.
The evolution of financial markets in recent years is a key driver of this trend. The incredible rise of the US stock market, fueled by the "Magnificent 7" technology stocks, has led many investors to index-tracking funds, which are cheap, highly liquid and in some ways more straightforward than investment trusts. Cash and bonds are also now a source of competition for trusts focused on income or capital preservation.
There are other factors. As wealth managers have consolidated in recent years, the relatively low liquidity of investment trusts has become more problematic. Fee transparency is also an issue; current cost disclosure rules mean investment trusts appear more expensive in comparison to many other kinds of investment, especially in the context of weak performance.
Unlocking value: takeovers and activists
While this has been painful for long-term holders, it creates fertile conditions for companies and investors who are able to take advantage of the disconnect between share prices and the value of the underlying assets.
We are seeing a significant uptick in takeovers; over the course of 2024 and 2025 to the end of March, there have been cash offers worth more than £3 billion for UK investment trusts.2 Some of the largest deals include Blackstone’s bid for Hipgnosis songs (£1.3 billion) and British Colombia IM’s bid for BBGI Global Infrastructure (£1.1 billion).
The disconnect is also attracting “activist investors,” who put pressure on companies to take steps that will close the gap between share prices and net asset value (NAV). The measures that companies have been turning to include share buybacks, more generous dividend policies, asset sales and mergers. The highest profile recent activist is a New York-based hedge fund called Saba Capital. Rather than picking one high profile target, it has taken significant stakes in over a dozen equity-focused trusts. Its efforts to get boards and investment managers replaced by its representatives have so far been unsuccessful, but it has catalysed broader change across the industry.
The industry response
In many cases, buyers of investment trusts have come from outside the industry. But increasingly, we are also seeing investment trusts initiate consolidation. By highlighting the value of underlying assets and boosting profitability and market liquidity, this process can help to restore investors’ interest and confidence in the sector.
Whether mergers and acquisitions are initiated within the investment trust industry, or by outsiders, we are seeing the emergence of a leaner, more focused market. Take the real estate sector as an example. There were 45 real estate investment trusts in the FTSE All Share at the start of 2023; today there are 36, of which six are in active merger situations and a further three are in a managed wind down or disposal process.3
We are also seeing a new approach to fees. In the past, investment trusts charged fees based on their net asset value, but many are now moving to a compensation formula based on the lower of net asset or market value, including a hybrid of both. This means investors won’t pay for performance they don’t get.
The thorniest issue is perhaps discounts. Share buybacks, the industry’s traditional response to wide discounts, have had modest success. In reality, discounts are primarily a reflection of investor demand; if other supply-side measures are adopted and lead to contraction in supply, discounts should be able to narrow.
The scale of the challenge should not be overstated, however. Discounts have always been a feature of investment trusts and they don’t need to be eliminated to win back support. Some investors even like the tactical opportunity in discounts that widen in periods of markets stress and narrow in better environments. However, even these more opportunistic investors need to see two-way movement in discounts; over the last few years, there has been little sustained narrowing.
How we use investment trusts
While many wealth managers have been retreating from investment trusts, we continue to believe they can have an important role to play in private client portfolios. This builds on Cazenove’s legacy in the investment trust world and our parent company Schroders’ support for the sector. Today, on behalf of clients, we hold £2 .2bn in investment trusts and manage twelve London-listed trusts.4
Within wealth management, we use investment trusts across a range of strategies. Many clients have exposure through our Diversified Alternatives Assets Fund, which is designed to provide easy access to a wide range of illiquid assets including renewables, infrastructure and private equity. We believe that the closed-ended structure of investment trusts makes them particularly well-suited to illiquid assets, avoiding the liquidity mismatches that can plague open-ended funds.
More broadly, we continue to see attractive opportunities in the investment trust world. Many companies are real businesses offering the prospect of stable and growing earnings, combined with effective governance arrangements. As they continue to evolve, they will remain an important tool for wealth managers looking to access differentiated, actively managed investments for their clients.
Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell. This article may include forward-looking statements based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements.
1 Source: LSEG Datastream
2 Source: Deutsche Numis
3 Source: Deutsche Numis, as of 29th April 2025
4 Source: Cazenove Capital and Schroders
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
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