Last year was a good one for investment trusts. They saw a total return of 16.1% (as measured by the FTSE All-Share Investments index, which excludes 3i) – well behind the All-Share index total return of 24%, but ahead of the more representative MSCI All Countries World index at 14.4%. Performance was helped by about a 2% narrowing of the average discount to net asset value to 12.5% and also by the use of borrowings by trusts to enhance performance.
Over the longer term, as Christopher Brown, head of investment companies research at JPMorgan, points out, wherever closed-end funds are run alongside similar open-ended funds, the vast majority of the former have outperformed, with ten-year average annualised excess returns of 1.5%.
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Investment trusts at a crossroads
Despite the strong overall performance, “a record £18.9 billion of net assets exited the sector”, says Brown. Share buybacks accounted for £10.2 billion and “there was a wave of managed wind-downs and liquidations”. There were also numerous mergers, usually involving a partial return of capital. Against 27 names disappearing (after 24 in 2024), there was only one new issue, that of Achilles Investment, which raised £54 million. Fundraising by existing trusts totalled £530 million.
Brown argues that “consolidation leaves behind a better-quality sector”, but it also reduces choice and competition. It may make sense to merge two competing trusts under the same management company, such as Throgmorton and BlackRock UK Smaller Companies, but a little internal rivalry can be beneficial and moving the management contract elsewhere is an alternative.
“The sector is at a pivotal crossroads, but all is not gloom,” says Brown. Regulatory hostility has diminished as a result of changes to cost-disclosure rules (after a hard-fought lobbying campaign), but listed investment companies have still been excluded from the Pension Schemes Bill as qualifying assets for defined-contribution default pension funds. Wealth managers and other professional investors dislike what they regard as the sub-contracting of their job to another fund manager, even if it results in better performance or exposure to an area of the market they do not cover.
Yet closed-end funds provide rare access to unlisted giants, such as SpaceX, as well as to property, infrastructure and other illiquid assets. The government’s preference for theoretically semi-liquid “long-term asset funds” (LTAFs) shows that the lessons of past fiascos with open-ended property funds have not been learned, or have been ignored. Brown questions whether semi-liquid funds offering redemptions of just 5% per quarter will be able to cope with market volatility and questions the practice of private-equity LTAFs buying secondary investments at a discount and then marking them up to net asset value.
Good performance has continued into 2026, with a 1.9% total return up to mid-February. The S&P 500 has been flat in sterling terms, but other markets, notably the UK, emerging markets and small and mid-caps, have continued to perform well. Yet, says Brown, £8.9 billion worth of strategic reviews, managed wind-downs and mergers are in the pipeline, not including the merger of BlackRock’s two smaller companies trusts.
The worst of times is the best of times
The reality is that investment companies are performing well, not because of net buying, but because trusts are shrinking faster than investors are selling. It’s not just trusts that investors are selling; there have been £119 billion of net outflows from UK equity-focused and UK-domiciled open-ended funds in the last ten years, of which £74 billion has been in the past four years. Some of this has gone into passive funds, such as exchange-traded funds (ETFs), and some into US/global funds, but UK-based investors are net sellers, especially of their home market. Investment trusts focused on the UK are only a modest part of the total, but all of them are UK-listed, so are caught up in the rush for the exit.
Contrarian investors will regard that as a reason to be relaxed about investing. In time and with continuing good performance, net buying will return to the investment trust sector, discounts will become much narrower or disappear, and there will be an avalanche of issuance, including of new trusts in a cycle that has been repeated multiple times in the last 50 years. At that point, but probably not before, it will be time to start battening down the hatches and preparing for tough times.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
