Why discounts are not a dirty word for investment trusts

The past few years have been anything but straightforward for investment trusts. Changing investor behaviour, higher interest rates and issues over cost disclosure rules have all put pressure on the sector – with private equity and activist investors taking advantage of opportunities in the sector during this challenging period.

The result of these pressures is that the average investment trust (IT) has been trading at a double-digit discount for the longest period in almost three decades. The average investment trust currently trades at a discount of 14% and has been wider than 10% since September 2022 — peaking at 19% in October 2023*. Interestingly, figures from Morningstar Direct show the average investment trust has returned 22.9% in the same period this double-digit discount has been in place**.

Many investment company sectors are particularly sensitive to interest rates, which, as we know, are now significantly higher in the UK and other developed markets.

These higher interest rates have pushed up the yields on bonds, making them much more attractive. As a result, money has flowed from equities to fixed income. Growth assets have also suffered because their long-term discounted cash flow is reduced and their ability to secure low-cost debt financing is more difficult.

However, we have started to see some rate cuts which will take some pressure off investment trusts.

Why now could be an opportunity

It is interesting to note that even during the Global Financial Crisis the average IT only traded at a double-digit discount for 25 months (September 2008 to September 2010).

A trust could be trading on a discount for numerous reasons, not just those mentioned above. For example, sentiment may just be weak on a trust – meaning investors think the asset value will go down. If an area is very unfashionable – as Japan has been for much of the past decade, or the UK is today – owners of shares wanting to sell will need to be prepared to offer their shares at a discounted price to attract potential buyers. Discounts may also widen because of trust-specific problems, like a change in manager or a prolonged period of poor performance.

Nish Patel, manager of the Global Smaller Companies Trust, told us more about the “double discount” at play in the UK market back in December 2024. 

However, poor sentiment is sometimes unwarranted, creating major opportunities for investors. For example, during Covid, the panic in markets saw renewable investment trusts – relying on the sun shining and the wind blowing – fall as much as 50%, only to quickly find their feet again.

Figures from the Association of Investment Companies indicate this may be an opportunity for investors. They found that the average investment trust returned 86.5% in five-year periods that began with double-digit discounts, compared with the 53.8% return achieved over five years when investing at discounts narrower than 10%*.

This means investors received an annual return of 13.3% over five years when investing at double-digit discounts, compared with 9% when investing at narrower discounts*.

AIC research director Nick Britton says: “Discounts can spell opportunity when it comes to investment trusts. Our research shows that investing at double-digit discounts is generally good for your pocket.

“The current period of double-digit discounts has been long, but it can’t last forever. Previous periods like this have ended with some combination of market recovery and corporate activity – and there’s no reason to think this one will be any different. It can be hard to invest when sentiment is downbeat, but history shows this is usually the best time.”

FundCalibre managing director Darius McDermott says: “There is no doubt the investment trust industry has had a number of external pressures in recent years. We have also seen sellers of investment trusts in both the multi-asset and wealth manager space. There is likely to be a bit of consolidation but there remains scores of investment trusts with excellent management, who have proven their ability to deliver to investors over a number of years. Whilst not always welcome, the involvement of some private equity and activist investors indicate they believe many trusts offer significant opportunities at these discounted prices.”

Ultimately, it’s always important to do your research. As a starting point, here are all the investment trusts that are rated by FundCalibre, and their current discount.

*Source: Association of Investment Companies

**Source: Morningstar, figures from 30 September 2022 to 17 February 2025

***Source: AIC, at 18 February 2025