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Britain's investment trusts, long trading at steep discounts to their net asset values, appear to be entering a potential recovery phase as shifting monetary policy, anticipated government reforms and growing activist engagement converge. After more than three years of double-digit discounts, the sector continues to weigh on the FTSE 250's performance, even as outflows from UK equities persist. Analysts indicated earlier this week that expected Bank of England rate cuts, combined with the government's forthcoming push to increase domestic equity participation, could help reduce chronic undervaluation. Meanwhile, activist campaigns are prompting boards to take more decisive action.
Britain's investment trusts, which have remained out of favour for several years, appear to be approaching a significant inflection point as falling interest rates, expected government initiatives to promote broader share ownership, and intensifying activist pressure begin to align in a way that could unlock value across the sector. Advertisement
These trusts, which have operated for roughly 150 years and invest pooled shareholder capital into diversified portfolios, were designed to offer stable dividend income. However, they have frequently traded below the value of their underlying assets. Discounts to net asset value have stayed in double digits for more than three consecutive years, marking the longest such period in at least thirty years.
With major names such as Tritax Big Box and RIT Capital Partners forming close to one-third of the FTSE 250, the benchmark's muted rise of 4.3% over the past year underscores the sector's broader underperformance. Data from the Association of Investment Companies indicated that the average investment trust share price currently trades at an average discount of 13% to NAV, in contrast to the historical average of roughly 4% during the six-year period between 2015 and 2021.
Discounts widened during the Bank of England's rate-hiking cycle spanning 2021 to 2023, when rising yields on lower-risk assets diverted investor interest. Sector sentiment has also been shaped by the broader weakness in UK equities, characterised by sustained outflows, limited new listings and increased take-private activity. UK equities recorded USD 32.4 billion in outflows over the past year, according to analysis by Barclays Research and EPFR.
London's FTSE 250 mid-cap index, valued at USD 380 billion, has notably lagged, rising just 4.3% compared with a 17% gain in the internationally exposed FTSE 100. Valuations have reflected this gap, with the FTSE 250 trading at 12.7 times earnings versus 17.4 times for the FTSE 100.
However, a shift in interest-rate direction may alter the landscape. Investors and analysts noted earlier this week that the Bank of England has signalled another possible rate cut in the coming month, alongside the prospect of additional reductions next year. Matt Ennion, head of fund research at Quilter Cheviot, indicated that a meaningful decline in rates would broadly benefit the sector.
At the same time, Finance Minister Rachel Reeves is expected to present measures in her upcoming budget aimed at encouraging pension funds to allocate more capital domestically. She is also likely to refine rules surrounding tax-free savings schemes, which could channel more household money into equities. Sharon Bell, a senior European equity strategist at Goldman Sachs, commented that the UK currently suffers from limited domestic participation in equities and that a stronger flow into risk assets would support longer-term returns.
A growing wave of activist activity is adding momentum. Boaz Weinstein's Saba Capital has been challenging several trusts that it views as underperforming. Weinstein said earlier this week that manager behaviour had improved for shareholders since the campaign began, particularly in the funds Saba holds.
Smithson Investment Trust, of which Saba owns approximately 16%, recently announced it would transition from a closed-ended to an open-ended structure. This shift would allow investors to exit at NAV minus costs, prompting its shares to rise by more than 7% following the announcement. Stifel analyst Iain Scouller observed that such a proposal offered a useful model for boards to consider when discounts exceeding 10% persist for extended periods.
Boards have also accelerated share buybacks. Winterflood Securities reported that year-to-date buybacks have reached a record INR 8.6 billion (USD 11.54 billion), 35% higher than the equivalent period a year earlier and already surpassing the total for the previous year. Winterflood research analyst Alex Trett remarked that boards engaging more proactively with investors have been better positioned to narrow or prevent further widening of discounts.
With monetary conditions easing, government incentives approaching and activists pressing for structural reform, Britain's investment trusts may finally be positioned to overcome years of neglect and persistent undervaluation.
Source - Reuters
5th Jun, 2025
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