Investment Trusts’ Lost Decade: From Heroes to Zeroes

A decade ago, Britain’s venerable investment trusts were riding high. Today, this 150-year-old industry finds itself in an identity crisis. Across almost all sectors, investment trusts have languished with middling returns, stubborn discounts to net asset value (NAV), and dwindling investor enthusiasm. The data paint a bleak picture, and the post-mortem unearths an uncomfortable question: has the “investment trust” lost the trust of investors?

Mediocre Returns in a Bull Market

By the numbers, the last ten years have been dispiriting. The average investment trust has struggled to keep up with plain-vanilla alternatives. Research comparing 80 matched pairs of trusts and open-ended funds (run by the same managers) found that 75% of the trusts did outperform their open-ended sibling on a pure NAV basis over ten years, by about 5.3 percentage points on average. 

However, this victory proved Pyrrhic. Unlike open-ended funds, trusts’ share prices can diverge from their NAV – and diverge they did. Share prices failed to keep up with NAV growth, as pervasive discounts blew open. Over five years, trust shareholders actually lagged their open-ended counterparts, and even over ten years the trusts’ share-price total returns only just edged ahead. 

In simple terms, much of the structural advantage that should have benefited long-term trust investors (like the ability to hold illiquid assets and gear up returns) never reached their pockets. Worse, broad market benchmarks left many trusts in the dust. Britain’s FTSE All-Share index delivered a solid total return in the past decade (roughly on the order of 6% per year, buoyed by dividends). 

In contrast, the UK investment trust sector as a whole has stumbled badly in recent years. From the end of 2021 to March 2024, investment trusts collectively lost 10.4% of their value, while the FTSE 100 gained 17.1% and the S&P 500 soared 22.5%. What was once a performance edge has morphed into a glaring gap. Little wonder investors are voting with their feet – yanking out £4.2 billion in 2023 and an eye-watering £3.9 billion in just the first quarter of 2024.

Persistent Discounts and Vanishing Demand

Perhaps the most telling statistic of this lost decade is the curse of the persistent discount. Investment trust shares have now traded below NAV for 29 months straight, the longest such stretch in 30 years. The average discount currently yawns around 15%, meaning investors value these funds at just 85p on the pound of assets. At the worst point last year, the discount averaged 19%, a post-2008 low. 

By contrast, open-ended funds always trade at NAV (by design, since investors can redeem at NAV). This structural disparity has turned into a glaring disadvantage: no matter how well the underlying portfolio does, trust investors can suffer if the market loses faith in the vehicle itself. 

Wide discounts and weak performance have attracted hungry activists to the scene. Hedge fund Saba Capital Management, smelling blood in the water, launched campaigns to “overhaul” a gaggle of laggard trusts whose recent returns it drily described as ranging from “underwhelming to disastrous”. 

Saba’s founder Boaz Weinstein has been agitating to give shareholders an escape hatch – pushing for some trusts to convert into open-ended funds so investors can cash out at NAV. Although incumbent boards have mostly resisted thus far (shareholders of six targeted trusts voted down Saba’s proposals), the pressure is clearly rattling the industry. 

As one wealth manager quipped, the sector had become “complacent” after years of captive investors and now faces a “massive wake-up call” to shape up or ship out. Faced with this unrest, many trust boards have scrambled to prop up their share prices – or concede defeat. Buybacks hit record levels as trusts repurchased £7.5 billion of their own shares in 2024, double the previous record, in an attempt to shrink discounts. There were 10 mergers and 7 liquidations of investment companies last year alone. 

In effect, boards are doing everything short of standing on a street corner twirling a “Sale 50% off!” sign. Industry assets have barely budged (£260 billion at end-2023, slightly down from £265 billion at start of the year) despite positive market moves – a sign of investors rotating out. 

Even adviser platforms – traditionally a growing source of demand – saw purchases of trusts plummet 28% in 2023, the first year of net outflows since at least 2011. In 2022, advisers poured in a record £1.3 billion, only to slam into reverse and pull money out in 2023. This abrupt U-turn suggests patience finally snapped; yesterday’s darlings have become today’s pariahs in model portfolios.

Why the Wheels Fell Off: Fees, Flops and Scandals

What explains this dramatic decline? The autopsy reveals multiple causes conspiring in ugly harmony. First, high fees have been a perennial drag. Many investment trusts charge higher management fees than comparable open-ended funds (some even still levy performance fees straight out of the 1980s playbook). 

Such fees quietly erode returns over time. As the Institute of Actuaries noted, index-like performance minus high fees is a recipe for “negative outcomes” for savers. In too many cases, investors paid active-fund fees for what turned out to be below-index results – effectively, they’ve been burning money for underperformance. The industry has started to respond (26 trusts cut their fees in 2023 to give shareholders a better deal), but one could argue it’s far too little, far too late. 

Second, liquidity and portfolio issues have played a role. The very feature that differentiates trusts – a closed-ended structure that can hold illiquid assets – became a double-edged sword. When sentiment turned, some trusts’ holdings (think property, private equity, or esoteric credit) were tough to value or sell, intensifying investor unease. 

A notable reputational hit came from the Woodford affair. Star manager Neil Woodford’s empire famously imploded in 2019, mainly due to illiquid bets in an open-ended fund. But his separate investment trust – the Woodford Patient Capital Trust – also turned into a slow-motion train wreck. 

Launched in 2015 amid fanfare and raising a then-record £800 million, that trust has since annihilated investor capital: by late 2024 its market value had collapsed to just £81 million, with shares trading at 10.8p (having listed at 100p). A 90% wealth destruction is one for the financial hall of shame. 

The saga shook faith in both open and closed fund structures, and cast a long shadow over the “cult of the star stock-picker.” As one regulator dryly observed, Woodford’s understanding of risk proved “defective” – a polite way of saying investors were led like lemmings off a cliff. 

Finally, macro forces have not been kind. Years of rock-bottom interest rates had propped up many trusts (especially those offering steady income) as investors chased yield. That reversed violently when inflation spiked and central banks slammed on the monetary brakes. Rising bond yields made the dividend yields of equity and infrastructure trusts look pedestrian, prompting income-hunters to reconsider their options. 

Higher rates also mathematically depress the present value of long-duration assets – exactly what many infrastructure and growth-focused trusts hold. It’s no coincidence that the average discount started widening just after the Bank of England began raising rates in late 2021. 

By October 2023, some previously beloved sectors were in fire-sale territory: for example, “growth capital” investment companies (venture capital-style funds) ended 2023 at an eye-watering 55% average discount to NAV, and even solid infrastructure funds that once traded at premiums flipped to double-digit discounts. In short, the post-pandemic economic regime change has not favored the closed-end fund model.

Are Advisers and Wealth Managers Part of the Problem?

An unsparing analysis must also point the finger at those guiding investors. Wealth managers and financial advisers have continued to recommend underperforming trusts long after the warning signs flashed red.

Why? In some cases, sheer inertia – investment trusts often have illustrious histories and loyal followings, making them staple holdings in many portfolios almost by default. 

Advisers extolled their benefits (diversified assets, independent boards, the ability to gear and not face redemptions) and were slow to acknowledge when those same features turned into bugs. There is also the issue of accountability and incentives. 

Prior to 2013, advisers had open-ended funds paying them hidden commissions, so many ignored trusts entirely. After commissions were banned, more advisers did start buying trusts (the number of advisory firms using them doubled over the past decade), which was a positive development. But once they finally hopped on the bandwagon, many rode it enthusiastically right over the cliff. 

Some wealth managers became cheerleaders for new trust launches and star managers – giving glowing recommendations to vehicles like Woodford’s trust – only to see clients suffer the consequences. Even as performance sagged, few advisers jumped ship quickly; selling an underperforming trust at a 20% discount is a tough conversation to have with a client, so the path of least resistance was often to hold on and hope. 

This allowed underachievers to stay on recommended lists far longer than they deserved. “Don’t worry, it’s only a paper loss, the discount will surely narrow eventually,” became an implicit mantra. Until, of course, it didn’t – and clients opened their year-end statements to find sizeable holes where their retirement dreams used to be. Industry analysts have not minced words on this dynamic. 

Ben Yearsley of Fairview Investing lamented that the sector had grown “far too complacent” with a captive investor base, and that boards and managers were not being held to account for poor results (at least not until activists showed up at the door). 

The complacency extended to those advisors who kept the faith even as evidence mounted against it. In the end, professional fund selectors and wealth managers are supposed to be the gatekeepers protecting retail investors from misallocation. With investment trusts this past decade, gatekeepers and fund managers together often formed a cozy club – one now being disrupted, embarrassingly, by outside activists and the cold slap of market forces.

Dented Pension Pots and Diminished Wealth

The consequences of this underperformance are not just academic – they are painfully real for investors’ wealth and retirement outcomes. Many individuals hold investment trusts in their ISAs, SIPPs and pension portfolios, expecting solid long-term growth or income. 

What they got was often a slow bleed. Even a small annual shortfall can wreak havoc when compounded over decades. Analysts at AJ Bell illustrate this starkly: a retiree who manages a 6% net annual return on their pension pot will end up with roughly £167,000 after 20 years (on a £50,000 starting sum). But if high fees and mismanagement drag that return down to 4%, the pot shrinks to about £110,000. That’s £57,000 vanished into thin air – or put differently, a 35% smaller pension for the same upfront investment. 

This is not trivial; it can mean the difference between a comfortable retirement and a frugal one. It appears many investment trusts have delivered exactly this kind of wealth destruction at the margin. A recent study found that nine in ten UK pension funds (many of which invest in the same equities that trusts do) underperformed a cheap index tracker over the past ten years, leaving savers with “significantly smaller” nest eggs.

 With numerous trusts failing to beat benchmarks – and some spectacularly trailing – they have undoubtedly contributed to these disappointing outcomes for investors. In plain English, if your advisor or pension manager stuck you in a bog-standard investment trust ten years ago, chances are you would have been better off in a low-cost index fund tracking the FTSE All-Share. 

That reality is as damning as it is ironic, given investment trusts’ storied reputation for steady stewardship of wealth through the generations.

Can the Trust Be Re-earned?

The million-pound question now is whether investment trusts can stage a comeback or if they remain destined to trade at a perpetual discount in the court of public opinion.

Optimists point out that today’s deep discounts are, in effect, an opportunity. “It can’t last forever,” argues Nick Britton, research director at the Association of Investment Companies, noting that previous bouts of double-digit discounts ended when markets recovered or boards took action. 

His research suggests buying trusts when they’re this unloved has historically paid off: five-year periods that began with double-digit discounts saw an average 86.5% total return, versus 53.8% when starting at tight discounts. In other words, today’s pessimism could sow the seeds of tomorrow’s outsized gains. 

Activists like Weinstein certainly believe so – Saba has been merrily scooping up discounted UK trusts and reportedly enjoyed “record inflows” from investors betting on his campaign. If nothing else, the prospect of further activist victories may force complacent boards to sharpen up or face extinction. Regulators, too, are circling. 

The Financial Conduct Authority’s new Consumer Duty rules, coming into force, demand financial providers (advisers and product manufacturers alike) ensure they’re delivering value for money to clients. That puts a spotlight on serial underperformers and fee-guzzlers. It’s not inconceivable that we’ll see stricter guidance or even interventions if certain trusts continue to act as a drag on investors’ outcomes. 

Meanwhile, industry groups are debating fee structures (some suggest trust managers should stop charging fees on gearing or gross assets, which inflate costs). And let’s not forget the court of public opinion and media scrutiny – nothing focuses a fund board’s mind quite like being lampooned in the press for running a “zombie” trust. 

Ultimately, the investment trust industry is at a crossroads. One path leads to reform, modernization and regained relevance: lower fees, improved transparency, and boards taking bold steps to eliminate persistent discounts (even if it means strategic mergers or winding up funds that have outlived their purpose). 

The other path is a slow fade into irrelevance, as investors shift to cheaper, nimbler vehicles. A sharp, unsparing column in the Financial Times recently asked whether investment trusts are still relevant at all in a world dominated by ETFs and open-ended funds. 

The answer will depend on whether trusts can play to their unique strengths – truly active, long-horizon investing – rather than being remembered for a lost decade of excuses. For now, wary investors could be forgiven for taking their money elsewhere. 

After all, “investment trust” has begun to sound like an oxymoron: over the past ten years, these funds tested investors’ patience and, too often, squandered their trust. If the next decade is to be any different, the industry must earn that trust back the hard way – through performance, accountability and maybe a bit of humble pie. Otherwise, the epitaph for this grand old sector might well read: In Investment Trusts We (No Longer) Trust.

RISK WARNING: All investing is risky. Returns at not guaranteed. Past performance and case studies are no guarantee of future results.

Disclaimer: The content provided on this blog is for informational purposes only and does not constitute financial advice. The opinions expressed here are the author's own and do not reflect the views of any associated companies. Investing in financial markets involves risk, including the potential loss of your invested capital. Past performance is not indicative of future results. 

You should not invest money that you cannot afford to lose. Mentions of specific securities, investment strategies, or financial products do not constitute an endorsement or recommendation. The author may hold positions in the securities discussed, but these should not be viewed as personalised investment advice. 

Readers are encouraged to conduct their own research and seek professional advice before acting on any information provided in this blog. The author is not responsible for any investment decisions made based on the content of this blog.

Alpesh Patel OBE

www.campaignforamillion.com 

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